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The Death Spiral

Is Xerox (NYSE: XRX) Making Money?

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Xerox (NYSE: XRX) is one of the more controversial value investments around these days.

A few months back, Xerox had enough value for Hewlett Packard (NYSE: HP) to make a $30 billion offer for it. Today, however, Levi Strauss (NYSE: LEVI) CEO and Hewlett Packard board member Chip Bergh told CNBC he thinks owning Xerox could bankrupt HP.

To elaborate, Xerox’s business is so dependant on physical offices that Bergh thinks Xerox cannot survive the mass closure of workplaces by coronavirus. To explain, Xerox’s business is the manufacture and servicing of copiers and printers.

For people under 40, a copier is a machine that makes paper copies of documents. Hence, Xerox’s business is physical paper documents.

Consequently, fewer people need Xerox’s services because tens of millions of office workers are working from home and using only digital documents thanks to Coronavirus. Thus, Xerox is dying along with the brick and mortar office for many professionals.

Is Xerox a Value Investment?

On the other hand, I think some people could consider Xerox Holdings Corp (NYSE: XRX) a value investment because of its price.

To explain, Mr. Market paid $36.93 for Xerox on 2 January 2020; $15.06 for Xerox on 26 June 2020, and $15.29 for XRX on 30 June 2020. Thus, Xerox lost over half of its share price in six months.

Therefore, Xerox’s share price could grow by 50% if the market for copiers and printers recover. On the other hand, Xerox could lose the rest of its value if the pandemic continues and people do not return to the office.

Therefore, Xerox’s share price could grow by 50% if the market for copiers and printers recover. On the other hand, Xerox could lose the rest of its value if the pandemic continues and people do not return to the office.

Additionally, many companies could shift many or most of their office workers to work-from-home to save money after coronavirus. Thus, Xerox’s business could never recover.

Does Xerox Make Money?

Xerox was making a little money at the beginning of the pandemic. In fact, Xerox (NYSE: XRX) reported making a quarterly profit of $712 million on quarterly revenues of $1.86 billion on 31 March 2020.

Conversely, Xerox reported a common net loss of -$2 million for the same quarter. Yet Xerox also reported an operating income of $70 million.

Xerox is making some money in the cororonavirus age. Notably, Xerox reported an operating cash flow of $173 million and an ending cash flow of $2.665 billion on 31 March 2020. Consequently, Xerox had $2.662 billion in cash and short-term investments on the same day.

Thus, I consider Xerox a cash-rich company for its share price. I guess Xerox makes that cash from leases on copiers and other equipment.

On the negative side, Xerox could lose that cash as companies cancel copier leases.  To explain, no responsible manager will pay a lease on a copier that gathers dust in an empty office.

Is Xerox a Dividend Bargain?

Dividend investors will find Xerox interesting because it is cheap and will pay a 25₵ quarterly dividend on 31 July 2020.

Overall, Dividend.com credits Xerox with an annualized dividend of $1, and a dividend yield of 6.64% on 30 June 2020. Thus, an investor could make $1 a year from a share of Xerox if the dividend continues. However, Xerox’s dividend has only been growing for one year.

Hence, Xerox is a cheap dividend stock. However, I am leery of Xerox because its business is collapsing. Thus, the Xerox dividend could end at any time if the company runs out of money.

Why Xerox is a Risky Investment?

I advise against buying Xerox despite the investment. I think this stock is too risky because owning Xerox is a bet that the world will return to pre-2020 conditions after coronavirus.

In particular, Xerox owners bet that most workers will return to the office after coronavirus. I find that scenario unrealistic, because of all the money companies will save by not having to provide office space.

For instance, a company that does not provide office space is not paying for a copier, a break room, a secretary or receptionist, security, insurance, a water cooler, office supplies, and office furniture leases. In addition, the company can eliminate the expense of leasing or renting office space.

Is the Office Dead?

Therefore, a company can save money by having employees work from home. I think the test will come if companies maintain productivity by having most office workers at home.

Any CEO who sees his company functioning smoothly with most of the office staff at home will wonder why the corporation is paying for an office. The CEO might wonder why don’t we sell the office and reinvest the money we were spending on it on something that makes the company money?

For example, a manufacturer could reinvest the office lease funds in the purchase of more machinery or production increases. Hence, the manufacturer could increase production and revenues.

Xerox’s Battle for Survival

I think more executives will ask such questions as the coronavirus pandemic continues. I predict the longer the pandemic lasts, the more the economy will contract. Under those circumstances, most corporations will cut expenses and offices and copiers are an obvious expense.

Xerox will need to modify its business to make money in that reality. One obvious adaption Xerox could make is selling more products to at home workers or companies that support at home workers such as copy shops.

Xerox faces a battle for survival in the next year. Smart investors will not go along for that battle. My advice on Xerox stock is to avoid it for now, but check back in next year. Reconsider Xerox (NSYE: XRX) if it retains its value and makes money next year.