August 22, 2010 in Business

‘New’ Xerox takes aim at new markets

 

Xerox (NYSE: XRX) has come a long way from the old copier manufacturer of yore. Equipment sales are now almost an afterthought for the company, and most of its business comes from support services these days.

That’s not a bad thing at all, as services tend to carry higher margins than hardware sales. And it gets even better: Through its newly acquired ACS division, which effectively doubled Xerox’s revenues in one fell swoop, the company plans to become a force in cloud computing services.

ACS is creating an “infrastructure on demand” type of service. It runs the IT infrastructure for companies and lets the companies develop and run their own applications on it – with high-priced but handy support service contracts attached.

That initiative is still in its infancy, though. In the just-reported second quarter, Xerox saw sales grow modestly over the year-ago period to $5.5 billion, while earnings surged 33 percent. “We’ve made excellent progress in scaling our services business and strengthening our leadership in the marketplace,” CEO Ursula Burns said.

The “new” Xerox is taking on a new set of rivals, trading in the Canon and Lexmark crowd for large business service providers. It won’t be easier than the plain old office-supply operation, but business services should provide value and opportunity for many years to come.

Ask the Fool

Q: What does it mean when a company is taken private? – B.N., Midland, Mich.

A: You know how a company “goes public” via an initial public offering (IPO), selling a chunk of itself in shares on the stock market? Well, it can go back to being a private company, if those shares are bought back and no longer trade publicly.

Hugh Hefner is looking to do that with the company he founded, Playboy Enterprises. Its stock has been swooning in the past few years, recently trading around $4 per share. In an effort to regain control over the company, and presumably because he thinks the company is undervalued, Hefner has offered shareholders $5.50 per share, a 40 percent premium. That news alone was enough to send shares up to nearly $5.50.

It’s not a done deal yet, though. Other bidders for the company may emerge, and there’s already talk that Penthouse may want to offer a higher price.

Q: Should insider trading activity matter to me as an investor? – F.G., Binghamton, N.Y.

A. Sometimes. Imagine that the CEO of Sisyphus Transport Corp. (ticker: UPDWN) sells a bunch of his shares. This might make investors worry that the company is in trouble. But remember that executives these days often get a major portion of their compensation in the form of stock. The CEO might just be selling some shares to generate cash to buy a house or pay a college bill. If many insiders are selling many shares all at once, though, that can be worrisome.

Meanwhile, if insiders are buying lots of shares, that’s most likely a promising sign since they’d presumably do so only if they expect the shares to rise.

I’m happy to share this valuable, albeit expensive, lesson in investing. I bought shares of Crocs at $29, didn’t sell them at $74, and finally did sell them at $7, losing many thousands of dollars. At the time, I owned a pair of Crocs and loved them. They were the most comfortable shoes I’d ever owned. Thinking “Aha, this is a classic Peter Lynch-style investment,” I started accumulating shares. Unfortunately, it turned out they had problems with inventory and distribution. – G.K., Blanchard, Idaho

The Fool responds: Crocs is a good example of a fad that doesn’t pan out for investors. When you spy a seemingly great new opportunity such as Crocs, think about whether it’s a fad that will likely fade out soon and whether its offerings can be easily duplicated by others. Also, check to see if it’s turning a profit and whether it’s bogged down by hard-to-manage debt.

Crocs ended up trimming its inventory by giving lots of shoes to charity – nice, but not a path to profits. Insiders selling more than $400 million worth of shares was also not a great sign.


Thoughts and opinions on this story? Click here to comment >>

Get stories like this in a free daily email