Xerox Not Seen Getting Back on Track Anytime Soon

Analysts said the company would have to step up outsourcing as a source of revenue, improve its billing system, speed up efforts at reorganizing its sales force and slash costs.
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Does

Xerox

(XRX) - Get Report

, a company that once enjoyed a reputation for stable and predictable earnings growth, suffer from endemic problems that will make it difficult to get back on track?

That's the question many analysts were grappling with Monday in the aftermath of the copier equipment giant's surprising

announcement on Friday that its fourth-quarter earnings were likely to come in 40% below Wall Street's estimates.

The company attributed its difficulties primarily to external factors -- unfavorable exchange rates, the Brazil crisis, concerns about Year 2000 -- but that did little to appease market watchers' fears about Xerox's internal woes.

"My feeling is that the problems they have are going to persist for a long time," said Shebly Seyrafi, an analyst at

A.G. Edwards & Sons

in St. Louis.

"There's a lot of competition in the digital copier market; they've make no real inroads into the printing market," he said, noting that the company's sales force was having problems with restructuring.

But the earnings warning only served to fuel analysts' fears following three straight quarters of disappointing results.

Seyrafi, who does not do any underwriting for Xerox and has a maintain rating on the stock, slashed his full-year 2000 earnings estimate to $1.65 a share from $2.30.

He was joined by

PaineWebber

and

J.P. Morgan

, which also lowered their expectations for the Stamford, Conn., company.

PaineWebber cut its fourth-quarter earnings forecast to 40 cents a share from 65 cents and its full-year 2000 forecast to $1.85 a share from $2.25.

J.P. Morgan lowered its rating for Xerox to long-term buy from buy.

Xerox shares were up 1 5/8, or 8%, at 21 1/2 in midday trading on Monday after falling about 14% on Friday. Analysts said the selloff attracted value players to the stock. (Xerox finished up 1 1/4, or 6%, to 21 1/8.)

Analysts said Xerox was facing problems both in its traditional copier business, where competition with such rivals as

Canon

(CANNY)

and

Sharp

remains tough, as well as in the cutting-edge printing sector, where the company has had trouble against leading opponent

Hewlett Packard

(HWP)

.

"There's no serious demand problem -- printer demand is strong," said William Gorman, analyst at

PNC Advisors

. "Their product flow will have to improve."

Gorman said he was re-evaluating his buy recommendation on Xerox. PNC Advisors does not do underwriting.

Going forward, analysts said the company would have to step up outsourcing as a source of revenue, improve its billing system, speed up efforts at reorganizing its sales force and slash costs.

On Friday Xerox's chief executive, Rick Thoman, conceded that 20% of the earnings shortfall would stem from costs related to a plan to consolidate 36 administrative centers into three. He also noted that Xerox encountered problems as it tried to divide its sales force according to industry rather than geographic area.

A survey by

First Call/Thomson Financial

had shown earnings estimates of 66 cents a share prior to the Friday announcement.

But Thoman tried to spin some damage control by saying that a lot of the pressures affecting the company would ease during the coming year and that the company would post "meaningful growth" in earnings in the second half of 2000.

Sounding unconvinced, analysts said they would not rule out a takeover bid for Xerox, although with a market capitalization of $14.4 billion it would be an expensive play.

Several analysts did, however, dismiss the possibility that Thoman, who became Xerox chief executive in April, would be ousted in the near term.

"They don't want to create the impression of more instability," said one analyst who spoke on condition that he not to be identified.