It has been more than 40 years since Xerox was a go-go swinger stock untrusted by staid mutual fund managers. Yet that has not stopped Citi slapping a double-your-cash "buy" on the company following last Friday's
profit warning "pre-announcement".
Now, Xerox has a special place in my heart as my first private sector employer. I recall fondly the interview with the departmental finance chief in which he spent much time lambasting the "matrix management" fad the company had recently taken on board. Equally fond is the moment a later chief, in front of staff, called country headquarters to tell his boss several times during an extended rant that the latest sales targets sent by him were ''bollocks". Which they were.
Still, in spite of my empathy, I do wonder about equity research that includes the words:
"it is too late to sell XRX shares at 7X revised earnings with a 20%+ free cash flow yield"
Really? That may prove right but it does look a statement that has built in some casual macro economic assumptions. There has been, as the report mentions, an unprecedented 20+% decline in consumable revenues. So what? Well, a great many companies have in this crisis taken to touting themselves as good defensive investments because they sell into operating rather than capital budgets. Logical theory on the face of it - but check out the Xerox reality.
Citi argue half of this 20+% is might be inventory destocking. Could be. Whatever it is Xerox is sitting at frightening multi year lows and well below book. Some of that reflects the wall it faces selling big iron, some its exposure to lease defaults from customers. And those are macro factors beyond the healing powers of yet more restructuring.
The long term chart:
All the same, Citi see 107.4% upside (very precise stuff, isn't it?) and are generally all-round enthusiasts. And the chart does, in the technical analysis tea leaf way, encourage that possibility.
Finally - on an entirely unrelated matter - the first disclosure of the report caught my eye:
"A director of Citi serves as Chairman and CEO of Xerox"