EUR 850.00 For Business Accounts Only

Morningstar | Secular decreases in print spending will likely impede Xerox's growth prospects.

Xerox is a leading provider of printing equipment and supplies as well as outsourced business and printing services for small, midsize, and large enterprises. However, we think the future of the company's printing equipment business is bleak, as mobile devices serve as an alternative to print. While we like Xerox's move to expand its offering in managed print services, or MPS, we do not expect stellar growth or profitability for the company in the longer term.In printing, global hardware and print spending has fallen year over year, and we expect this trend to continue over the long term. Further, digitization of documents and electronic workflow have been eliminating paper in business processes, which has led to a page volume decrease and the consolidation of printing devices. Additionally, single-function printing devices have become commoditized and are being increasingly replaced with multifunction printers. This has resulted in a decrease of the total number of printing devices in offices. That said, the lower volumes of printers in offices are weighing on Xerox's revenue, despite multifunction printers being higher-priced. Although Xerox benefits from multiyear contracts across its services and print businesses, the operating environment is fiercely competitive, and we do not see the company benefiting from significant customer switching costs. In turn, we are skeptical of the company's ability to generate excess returns on capital over the next decade, which is necessary to warrant an economic moat.On the bright side, we like Xerox's focus in MPS to optimize and manage a company's document output, although the clear majority of print providers are expanding their capabilities in this area. Further, we think the company's decision to split its business process outsourcing operations from its printing business will simplify the decision-making process regarding which areas to focus on, while enabling the company to concentrate on revenue growth, margin expansion, and disciplined investments in attractive growing markets. We are also optimistic about Xerox's cost-cutting initiatives, which we expect to take full effect by 2019.