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Wall Street, California | STOCK EXCHANGE

Xerox a Deal at This Price; General Mills Serving Up Food for Thought

Stock Exchange, which appears each Tuesday, lets readers listen in as staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks.


Xerox (XRX)


Jim: We're revisiting a stock we reviewed earlier, Mike, and, of course, you know Xerox well because of that book you wrote about the company. By the way, how long do we have to keep running your plug at the bottom of this column?

Mike: At least until my next book.

Jim: Anyway, Xerox is back in the news--for all the wrong reasons. But I won't say I told you so.

Mike: Yes, I'm afraid I look at today's chat as returning to the scene of the crime. When we last talked about Xerox's stock (Sept. 28, 1999), you panned it and I recommended it. It's the worst pick I've ever made. I guess a lot of knowledge is a dangerous thing.

Jim: But you have lots of company, because many thought Xerox was going to bounce back by now.

Mike: I feel much better. When we talked about Xerox last time, Rick Thoman had just been named chief executive. He came in with a lot of optimism that he was going to turn around the big ship. Well, Rick is gone now.

Jim: He lasted all of one year.

Mike: And he was succeeded by his predecessor, Paul Allaire. Allaire is struggling again too, with Xerox posting some really bad results lately. Its stock is now selling for less than $11 a share, which isn't much above its net worth.

Jim: It's almost as though the stock market is saying that, if we liquidated Xerox today, you wouldn't get much more for your stock than . . .

Mike: If you took all of Xerox's assets and sold them in my driveway on Sunday.

Jim: To be fair, as our colleague Tom Petruno noted, that net-worth figure is misleading. That's because Xerox's assets include such intangible items as the brains of its employees.

Mike: True. Xerox has some of the smartest engineers and scientists in the world. But that hasn't kept its earnings from plunging. Expectations for Xerox are now about as low as they were for George Bush going into last week's debate.

Jim: This stock traded around $60 in early 1999, so you can see how much it has lost. You could probably buy this company now for roughly $9 billion, which ain't much when you realize we're talking about Xerox here.

Mike: So let's go over their problems.

Jim: Where do we start? Xerox can't seem to move beyond its basic copier business into the digital office, it's getting killed by competitors in copiers and printers, its sales force is defecting at an alarming rate, and questions abound about its management.

But I see Xerox's biggest problem being that the company--for all its vaunted efforts to move into the digital age and become a provider of copiers, printers and so forth for the wired office--is still mainly a builder of stand-alone copiers.

Mike: I disagree. Xerox is no longer really a copier company. But I do concede that when it comes to its other products it has its job cut out. We're talking about networking printing devices to other digital devices in the office, that type of thing. These are difficult businesses in which Xerox, despite having invented the digital technology more than 25 years ago, is an also-ran in terms of commercializing it.

Jim: Xerox shocked the world with another lousy quarter in the first three months of this year, then did it again in its second quarter. And two weeks ago, it really dropped a bombshell by saying it expects a loss in its third quarter and hinted it might slash or eliminate its dividend, which it has paid for more than 200 straight quarters.

Sure enough, Xerox did just that Monday: It cut its quarterly dividend to 5 cents a share from 20 cents, to save $400 million a year.

That's another reason we've got a stock selling for less than $11.

Mike: Isn't it ironic? For a long time people hunting for promising stocks would repeat the adage that "they hoped to find the next Xerox," which is to say an unheralded stock that turned its owners into millionaires. But companies that might once have looked like the next Xerox can easily end up like today's Xerox. Are you listening, Microsoft? Anyway, what do you think of Xerox's stock now, Jim?

Jim: This might surprise you, given everything I've said, but I think Xerox is a screaming buy.

Mike: Xerox has left me screaming for a long time now, but guess what? I agree.

Jim: I don't think Xerox can go much lower, and I see two things happening that will help the stock. Either Allaire or his successor will dramatically restructure Xerox--again. Or Xerox will get taken out. I don't know which company might want to buy it, but at this price Xerox's talented work force and its incredible brand recognition have to appeal to someone. Things can hardly get worse.

Mike: My personal rule is that things can always get worse. But I agree. I don't know what will happen with Xerox, or how it's going to get out of this deep slump. But it's hard to believe that whatever it is, it will happen at a higher price than $10 a share. It may be a bumpy ride, but at this price Xerox is a buy.

General Mills (GIS)

Jim: Don't buy

Mike: Buy


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