Investors are infatuated with hot, young, rapidly growing tech companies. So you might be surprised to learn that the second-best performer in the S&P 500 has been around for more than a century.
Xerox (XRX), founded in 1906, is having quite a year: Its stock is up nearly 70% in 2019. Curiously enough, the best stock in the index is an even older company, cosmetics giant Coty (COTY) — founded in 1904.
What’s behind Xerox’s success? Does anyone really use photocopiers anymore?
Xerox is soaring because it is making a bold bet to morph from a stodgy documents company into a more dynamic tech firm.
Activist investor Carl Icahn has pushed Xerox to make changes and Icahn’s hand-picked CEO John Visentin has made big moves, including a plan to turn Xerox into a holding company with separate operating units like Google (GOOGL) parent company Alphabet.
Shareholders will vote on the proposal at the company’s shareholder meeting on May 21.
Xerox has said that converting to a holding company will make it easier to buy and incubate other businesses and to keep them at an arm’s length from Xerox’s core operations. Xerox should also be able to reduce its tax bill and protect some of its key patents more effectively as a holding company.
The company clearly is banking on new growth opportunities to rejuvenate the overall business. Visentin said at Xerox’s annual investor day event in February that it plans to focus more on software and services.
Xerox’s sales may not grow for another two years
But the transformation is going to take some time — and Xerox, despite the stock surge, is still a company that nobody will confuse with Google, Amazon (AMZN), Netflix (NFLX) or other hot, momentum companies.
Visentin has said that the goal is for Xerox to post flat to growing sales by 2021.
Xerox’s earnings per share are only expected to rise about 2% annually, on average, over the next five years. But that would be an improvement over the average decline in earnings of more than 5% a year over the past five years.
Analysts are skeptical though. Of the five that still cover Xerox, three have “hold” ratings on the stock while the other two have it rated a “buy.” The consensus price target on Xerox’s stock is $35.50 – just 7% higher than current levels.
Xerox is making a bold bet to go it alone. The company had planned to merge with Japanese rival Fujifilm but the deal was abandoned last year after Icahn and another activist investor, Darwin Deason, sued to block it.
New CEO has his work cut out for him
As part of a settlement with Icahn and Deason, Jeff Jacobson stepped down as Xerox CEO and Visentin was installed in his place.
Icahn had pressured former Xerox CEO Ursula Burns to spin off the company’s business services division in 2017. That company, now known as Conduent (CNDT), has fallen nearly 30% since the separation from Xerox.
Icahn is Xerox’s largest shareholder, with a more than 10% stake. Deason owns nearly 4% of Xerox, making him the company’s fifth biggest investor.
Institutional investing giants Vanguard, BlackRock and State Street Global Advisors are the second, third and fourth largest holders of Xerox. They own a combined stake of just under 20%.
These investors have to be pleased with Xerox’s latest stock gains. But it may be hard for Xerox to duplicate them until the company can prove that it can get sales growth back on track.