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Will Xerox copy bad news?
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December 13, 1999: 5:26 p.m. ET
Analysts fear company's weak sales will continue in 2000 despite assurances
By Staff Writer Chris Isidore
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NEW YORK (CNNfn) - Xerox Corp. believes the bad news that has plagued it this year ends with the new year, but analysts are afraid the problems are just beginning.
J.P. Morgan and Prudential Securities downgraded the stock Monday, as its analysts said despite assurances from company executives Friday evening, they think things look like they're going to get worse before they get better.
The company announced after the 4 p.m. New York market close Friday that it would report weak sales due to Y2K issues among customers, economic problems in Brazil and the strength of the U.S. dollar against the euro. It also said it was suffering from a reorganization of its U.S. customer administration.
Assurances on 2000 doubted
The company officials tried to put the best spin on the bad news Friday.
"While I am disappointed with these adverse developments, the primary reasons are clearly unrelated to long-term fundamentals," Rick Thoman, Xerox president and chief executive, said in the statement issued Friday. "In 2000, the Y2K issue disappears, the U.S. customer-administration issues will progressively improve, we expect some recovery in Brazil and our sales-force reorganization will have been implemented."
"At some point the execution shortcomings shake our confidence ... and that point has been crossed."
- J.P. Morgan report downgrading Xerox
However, Thoman would not give guidance to analysts about earnings or revenue numbers for 2000 during an angry conference call Friday, saying too many factors are still unknown. From the tone of questions during the conference call, more downgrades looked likely soon.
"While we thought there might be risk to 4Q, most of our concerns center around 2000," the Prudential analysts wrote Monday, downgrading the stock to a "hold" rating from an "accumulate." "We still think there may be more shoes to drop on the operational front. Further, we think the pre-release of 4Q will cause a surge of defections in the sales organization and management ranks. Just when Xerox can ill afford the to lose good people, we see Xerox resumes all over the competitors' offices."
Execution problems severe
Prudential analysts also see sales going to competitors, rather than being stymied by the factors Xerox cited such as Y2K.
"Over the last week, we have visited virtually every major player in the copier industry. Danka, Ikon and Global are all running slightly ahead of expectations in 4Q with better than expected equipment sales cited. The problems at Xerox appear to be invigorating the competition. In fact, we think these companies are increasingly attractive due to the problems Xerox is having and should benefit throughout 2000."
The Morgan report was slightly less negative, downgrading Xerox to a "long-term accumulate" rating from a "buy." But it also was concerned about the future.
"The big trouble is execution, and this on several fronts," the Morgan report said. "Worse yet, we get that sinking feeling that the persistence of Xerox' misfires with its sales force may end up polluting the company's franchise and making a little more than a dent in the brand and competitive position."
The report says that Morgan still believes in Xerox's basic business plan of building on its franchise, technology and market position at the high end to take the document world digital.
"However, at some point the execution shortcomings shake our confidence in the story, and that point has been crossed."
Stock price drop sparking interest
But even some investors who have sold Xerox recently think the stock is becoming attractive at current valuations, about 10- to 11-times 1999 earnings.
"The company is going to have a hard time in the short-term," said Dave Basten, portfolio manager for Yorktown Classic Value mutual fund. He sold the fund's Xerox holdings, at the time the fund's largest position, about three months ago. "We probably will be a buyer by the first of next year. It's gut wrenching to see a company go through this, but we see a lot of promise."
Basten, and even some Xerox critics, say the company has a good plan for dealing with offices where more and more documents are digital, decreasing the need for traditional copiers. But the problems are highlighting the problems that transformation could cause for the entire sector.
"The bottom line is that the copier industry is transitioning faster than anyone anticipated," Ben Reitzes, an analyst at PaineWebber, told Reuters Monday. "The disadvantages of a copier company heading into a networked, digital world are now being highlighted more than ever before."
But Reitzes added, "I think Xerox's disappointments have been a dark cloud over the whole sector for quite some time now. (But) I think a lot of the problems at Xerox are Xerox-centric, due to the fact that this is a bungled restructuring program."
Mixed performance for competitors
The three Xerox competitors mentioned by Prudential had mixed results in Monday trading. Ikon Office Solutions Inc. (IKN), the second-largest copier service and supply house, was down 3/16, or 2.7 percent, to 6-13/16 at the close. But Global Imaging Systems (GISX) was up 1-1/2, or 10.5 percent, to 15-3/4 at 4 p.m., while the American depository receipts of British firm Danka Business Systems Plc (DANKY) were up 1/16 to 13-1/8 at the New York close.
Xerox's stock was at 21-1/8 at the close Monday, up 1-1/4, or 6.3 percent, from the after-hours sell-off that occurred Friday night after the announcement. The stock closed Friday 19-7/8 in consolidated trading, down 4-7/8, or nearly 20 percent, from Friday. But even with Monday's rebound, the stock has lost almost half its value since it warned about third-quarter results Oct. 8.
Reuters contributed to this report 
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Xerox Corp.
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