Xerox undervalued?
Barron's: Shares could soar on color copying
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Last Update: 3:27 PM ET Apr 29, 2006
WASHINGTON (MarketWatch) - Things are looking up for Xerox Corp., but its share price doesn't reflect a number of important advances, according to the May 1 edition of Barron's.
The Stamford, Conn.-based company (XRX : Xerox Corporation
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Last: 14.04+0.08+0.57%
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14.04, +0.08, +0.6%) , best known for its copiers, has aggressively reduced its debt, bought back shares and could soon see its credit rating moved up to investment grade, said the financial weekly, which credited CEO Anne Mulcahy with re-energizing the company since taking the helm in 2001.
Key to the long-term outlook is a major transformation in Xerox's product line away from "light-lens" technology to digital systems, setting up the firm for a future that will see most pages printed in color, Barron's said, noting that color generates five times the revenues of black and white.
Nevertheless, Xerox shares have barely budged over the last two years due to stagnant revenue growth, Barron's noted. At the same time, net income and gross margins have been crimped by rising labor costs, aggressive pricing on some black-and-white office printers and a decline in equipment sales.
Still, the shares are trading at just 12.4 times analysts earnings estimates for the next year, compared to 17.5 times for rivals Canon (CAJ : canon inc adr
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Last: 75.80+2.27+3.09%
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75.80, +2.27, +3.1%) and 14.6 for Hewlett-Packard (HPQ : Hewlett-Packard Co.
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32.47, -0.79, -2.4%) , Barron's said.
The stock seems even cheaper if the disappointing first-quarter results were indeed what Mulcahy describes as a "blip" in execution, and the company follows through on the CEO's pledge to "deliver very credible returns for the balance of the year," the article said.
Growth in color-printing is a key to Xerox's long-term revenue outlook. Right now, color represents only 8% of Xerox's total printed pages, but that accounts for more than 30% of total revenue, Barron's said. Mulcahy said Xerox's "revenue dynamics are shifting."
James Benson, a partner and securities analyst at Harris Associates, which manages the Oakmark family of mutual funds, told Barron's that Xerox is a "$20 billion company trading at around $13 billion." A market value of $20 billion implies a stock price of $20 to $22 a share, up more than 44% from its current level, Barron's said.
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