Cautious optimism
SG Cowen sees improving trends at Xerox

By Susan Lerner,
Last Update: 4:14 PM ET Aug. 26, 2003

NEW YORK (CBS.MW) -- Lucky for Xerox, Steve Weber thinks the future is looking like it won't be a copy of the recent past.

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In the last few years, Xerox has struggled with major problems including fierce competition in the office equipment market and accounting troubles. In June, six former Xerox executives settled civil charges that they misled investors about earnings to impress Wall Street and boost the company's stock price. See related story.

Now, however, the SG Cowen analyst says although he's still cautious, revenue trends should be improving. Weber expects enough margin improvement to deliver 25 percent earnings per share growth in 2004 and even more in 2005.

"With a bevy of new, price-competitive monochrome products ... we are hopeful that Xerox can recoup enough market share over the next two to three years to more than offset the decline in equipment prices," Weber wrote in a research note. As for color equipment, Weber thinks that with volume deliveries of the company's iGen 3, scheduled to start in the first half of 2004, color equipment sales could grow by 25 percent next year and perhaps faster in 2005.

Weber noted that post-sales revenue will lag by three to four quarters so he expects top line growth will be just 1 to 2 percent in constant currency turns in 2004 and 4 to 5 percent in 2005.

Against that backdrop, the analyst boosted his recommendation on the stock (XRX: news, chart, profile) to "strong buy" from "market perform."

He also believes the company's financial picture is brighter and its liquidity needs look manageable.

"The balance sheet should be on a steadily improving course, said Weber. "Looking to 2004-05 ... it appears that the requisite liquidation will be there to pay off the maturing debt while maintaining a relatively comfortable cash cushion."

Xerox shares rallied on the call, closing up 85 cents, or 8.9 percent, at $10.39.
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