Xerox Corporation (XRX): There Are Better Alternatives to This Business Machines Company

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The name Xerox Corporation (NYSE:XRX) has become synonymous with the copier business, with many office workers using phrases such as “I need to go Xerox these reports,” regardless of what company actually manufactured that particular copier. Xerox currently trades at a seemingly low valuation, pays a nice dividend, and is one of the market leaders. Is Xerox one of the few remaining bargains in the markets, or is it a trap that should be avoided? Are any of the other major competitors a better investment?

Xerox Corporation (NYSE:XRX)

Xerox in a nutshell

Xerox Corporation (NYSE:XRX) is a leading manufacturer of not only copiers, but printers, fax machines, and multifunction units as well. The company operates in more than 160 countries, but still derives the bulk of its revenue (64%) from the U.S.

What I was surprised to find out during the course of researching Xerox was that only 42% of the company’s revenue comes from sales of their machines. The majority of Xerox Corporation (NYSE:XRX)’s revenue comes from its Services segment, which consists of business process outsourcing, document outsourcing, and information technology outsourcing.

Looks cheap…

At just 8.3 times the current fiscal year’s expected earnings, Xerox looks to be very cheap. The company also pays a 2.5% dividend yield, which the company has never reduced since it began paying dividends in 2008. Xerox is also trading at a steep discount to its historical average P/E ratio, which is closer to 14 times earnings.

but it’s not

Don’t be fooled by that quick glance at the number. The printing/copying business has many challenges ahead of it, such as low margins, low spending, and longer product lifespans. Xerox Corporation (NYSE:XRX)’s operating margins narrowed significantly in 2012 and are projected to do the same this year. While Xerox is anticipating its revenues to shift more towards services over the next few years, this aspect of the business comes with lower margins than selling equipment.

When the recession hit a few years ago, most enterprises and governments (including the U.S. Government) drastically cut IT spending, and it is yet to fully recover. This is especially the case for the U.S. Government, who seems to be stuck in a constant “budget mess,” and has effectively frozen spending on new equipment, and who was (at one point) one of Xerox Corporation (NYSE:XRX)’s best customers.

This also is an example of my point of longer product lifespans as mentioned above. While many customers are using their copiers and printers longer than they were in the past due to financial concerns, some are holding on to their equipment for another reason entirely. Quite frankly, there seems to be a general lack of innovation over the past decade or so in the printing and copying business. The HP Photosmart printer sitting next to me is four years old and in my opinion at least, is not significantly different from the current model.

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