Xerox Corporation (NYSE:XRX) has become synonymous with the copying industry, so much so that office workers will actually refer to a copier manufactured by another company as “the Xerox.” However, with lower corporate spending and lower margins leading to flat revenue, I believe that this particular company is a bit too pricey, even at the single-digit P/E multiples that it trades for.
Xerox is one of the leaders in document equipment, such as printers, copiers, fax machines, and multifunction devices. The company operates in over 160 countries, but most revenue (64%) comes from the U.S.
45% of Xerox Corporation (NYSE:XRX)’s sales come from the Technology segment, which includes all of their machines sold to businesses and individuals. The rest comes mainly from the Services segment, which involves business process outsourcing (BPO), document outsourcing, and information technology outsourcing.
Most of Xerox Corporation (NYSE:XRX)’s recent growth can be attributed to its acquisition of Affiliated Computer Services (ACS) for $6.4 billion, and this deal tremendously increased the company’s service capabilities. Before the merger, 80% of ACS’s income came from services which include equipment rentals, maintenance, supplies, and financing.
Challenges facing Xerox are mainly due to two things: decreased enterprise/government spending and dropping margins. The latter is due to the intense competition and pricing pressure from other companies such as Canon Inc. (ADR) (NYSE:CAJ) and Hewlett-Packard Company (NYSE:HPQ), both of which are several times larger and more financially flexible than Xerox.
Valuation
On the surface, Xerox looks relatively cheap, trading at just 7.1 times forward earnings. However, given the debt load of the company, and the stagnant growth projections for the next few years, this may even be too much.
Xerox’s revenues dropped 1% in 2012, and are projected to increase by 1.5% in 2013, however a slightly better operating margin is expected to produce earnings growth. 2013’s consensus earnings of $1.12 per share are expected to rise to $1.19 and $1.27 in 2014 and 2015, respectively, for earnings growth of 6.3% and 6.7%.
This still sounds like pretty reasonable valuation, until you factor in the company’s $8.4 billion in long term debt. When you add this to Xerox’s market cap of $10.3 billion, the market is actually valuing Xerox Corporation (NYSE:XRX) at about $14.70 per share or 13.1 times forward earnings, which is a bit high considering the slow and uncertain growth.
Alternatives
Hewlett-Packard Company (NYSE:HPQ) is one of the leading makers of printing and copying equipment, as well as a variety of computers and peripherals. I wouldn’t consider Hewlett-Packard Company (NYSE:HPQ) for a long-term investment until its new turnaround starts to produce tangible results. CEO Meg Whitman recently said that the company will experience earnings growth next year, a statement that helped fuel the stock’ srecent rally off its low of $11.35 just a few months ago. If it were still in the low-to-mid teens, I would recommend taking a chance on Hewlett-Packard Company (NYSE:HPQ), but at the current levels, I don’t think the potential reward quite justifies the risk.
Canon Inc. (ADR) (NYSE:CAJ), which is based in Japan, has proven itself to be able to create shareholder value even in the face of changing industry conditions. At first glance, Canon may appear expensive at over 16 times forward earnings. However, of the major printing/copying equipment manufacturers, Canon Inc. (ADR) (NYSE:CAJ) is by far the most stable company, revenue and earnings-wise. They also have over $8 billion in cash and virtually no long term debt, a huge positive for long-term investors.
Conclusion
As far as document equipment companies go, there are slim pickings as far as long-terminvestability goes. However, if you insist on investing in this sector, a stable company with a diverse product line such as Canon Inc. (ADR) (NYSE:CAJ) seems to be the way to go. Barring a pullback of 20% or so, Xerox is definitely a “stay away” as far as I’m concerned.
The article There Are Better Options Than This Document Equipment Manufacturer originally appeared on Fool.com and is written by Matthew Frankel.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
