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Xerox Can't Copy Its Past

Stocks in this article: XRX HPQ ACN IBM CAJ DDD

NEW YORK (TheStreet) -- Past performances aren't indicative of future results. This is arguably the most popularly cited "buyer beware" statement about the market.

In the case of Xerox (XRX), a company known for its copiers and printers, management has tried -- unsuccessfully -- to duplicate its history of strong revenue and earnings performances. Due to restructuring-related charges and growth challenges with outsourcing services, its largest business, management warned in October that profits for this quarter would come below expectations. So I caution investors about bidding up these shares, which are now at their 52-week high. Xerox's money-printing days are over.

With Xerox stock still 80% below its all-time high, it would be a gross understatement to say that the company has seen better days. While investors have every right to be encouraged by the company's 82% gains in 2013, I believe this was more of a reaction to how far Xerox had fallen. In many respects, Xerox's 2013 performance was similar to the rebound seen in Hewlett-Packard (HPQ).

Understand, however, that companies don't reach these depths because market dynamics tip in their favor. Management has been (and remains) under constant pressure to deliver the growth that Wall Street craves. To its credit, Xerox has listened attentively and has responded with several acquisitions over the past couple of years. One of these buys was software-as-a-service (SaaS) company Customer Value Group that was picked off last year for an undisclosed amount. Clearly Xerox is not sitting on its hands. 

Management seems willing to look for growth opportunities anywhere -- as unassuming as the prospects may be. Without meaningful results in ventures like IT outsourcing to offset the eroding printing and copying business, management might as well have done nothing. And investors waiting too patiently for this story are doing themselves a disservice while better growth opportunities pass by.

Xerox will report fourth-quarter earnings results Friday. The Street will be looking for 29 cents in earnings per share on revenue of $5.64 billion, which would represent a year-over-year revenue decline of almost 5%. And this is while earnings per share are expected to decline by a penny. Relative to what the company has done over the past several quarters, I believe Xerox will have no problem with these targets.

Although the October quarter wasn't spectacular, Xerox did show positive signs with its restructuring efforts. The services segment, which now makes up close to 60% the company's total revenue, grew 3% year over year and posted a 9% jump in profits. I will grant that 3% growth is nothing to write home about. It did, however, offset the 4% decline in the legacy document technology business.

On Friday, management must be able to answer how long the services business can carry the entire load, given that the printing and copier business remains in a continuous decline. Making matters worse, as evident in the single-digit growth posted in the third quarter, services revenue has now begun to slow.

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