Why Does Xerox Want to Copy IBM's Business Model?

"There are no second acts in American lives," according to author F. Scott Fitzgerald. But Xerox (XRX) , known for its document copiers and printers, is working to build itself into a cloud and business analytics company.

This is the same kind of transition IBM  (IBM) engineered a decade ago. The company's recent earnings show it hasn't been entirely successful.

That could be the case for Xerox, which reports third-quarter fiscal 2015 earnings results before the opening bell Monday. The company's documents products have been surpassed and in some cases rendered obsolete by digital technology alternatives. That's why to combat the decline, Xerox is working to de-emphasizing its legacy hardware businesses in favor of high-growth service businesses.

It's a multiyear project the company hopes will help turn its fortunes around. And those fortunes need turning. At around $10, Xerox shares are down 26% for the year to date, nearly 19% for the past 52 weeks and down 23.5% for over 10 years. Investors who've held the shares since the all-time high of around $60 have likely lost a fortune.

Xerox shares do appear attractive at just 14 times trailing earnings, compared to a 21 price to earnings multiple for the S&P 500 (SPX) index, but Xerox' business outlook and competitive position are not. Not only does the company continue to suffer eroding sales across all of its business categories, profits continue to decline due to eroding operating margins, which declined 160 basis points to 8.2% in the second quarter.

Earnings per share for just-ended quarter and the full year are projected to decline, so where's the value? For fiscal 2016 Xerox is projected to earn $1.06 a share, suggesting 10% year-over-year growth above projected totals of 2015. But the company spent $611 million on stock buybacks in the first half of the year, and there's a plan to buy a total of $1.3 billion worth of shares for all of 2015.

It would seem, given its struggles with gross margin, Xerox' aggressive buyback plan is factored into analysts' earnings-per-share forecasts, especially when revenue for both fiscal year 2015 and 2016 are projected to decline.

Owing to recent restructuring initiatives and multiple cost cuts, the company is much leaner today than a decade ago. But cutting costs without strategic growth initiatives won't generate the sort of profits to make Xerox a worthwhile investment today, especially since it's projected to grow earnings at an annual rate of 5% in the next five years. That growth rate would be about one percentage point slower than the rate produced by the S&P 500 in the past couple of years.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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