EUR 850.00 For Business Accounts Only

Morningstar | Xerox in a Paper Jam but Significant Cost-cutting Expected; Raising FVE to $30. See Updated Analyst Note from 17 Apr 2019

We fear that Xerox, the eponymous maker of copy machines, is losing its edge in the competitive enterprise print industry. Despite our belief that this high uncertainty, no-moat name has bleak growth prospects, we think Xerox can execute on major cost-cutting initiatives. As a result, we are raising our fair value estimate for Xerox to $30 from $27.50. Still, we believe investors should wait for a higher margin of safety before investing in Xerox.

We think the print industry is in a jam as the workplace becomes increasingly more digital whether it’s for economic, environmental or ease-of-use purposes. Additionally, we believe overpricing has led to Xerox’s eroding switching costs, reflective in their declining equipment market share amid competitors’ Canon and HP’s growing share. We think this secular decline as well as its competitive positioning is problematic for Xerox as nearly all of Xerox’s offerings are dependent on one another. In fact, only about 13% of print supplies revenues are unbundled from other Xerox contracts. We think Xerox’s eroding market share is also explained by print quality. As enterprises reduce their printer and copier fleet, we think what enterprises are printing is likely more important on average--leading enterprises open to opting for Xerox competitors often known for better print quality and servicing, like Canon.

Xerox recently announced efforts to expand into digital print packaging and printed electronics. Still in the early stages, we think this will be a tough market to enter given the high supply costs involved, which we believe is also a reason as to why businesses have been slow to adopt 3D printing for commercial use.