Promote Xerox Inventory As a result of Workplace Printer Demand Is Shrinking, Analyst Says

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Xerox headquarters in Norwalk, Conn.

Michael Nagle / Bloomberg

Xerox Holdings

Stocks traded lower Thursday after Morgan Stanley analyst Katy Huberty downgraded her rating for the printer and copier company from Equal Weight to Underweight, with a new price target of $ 18 versus $ 20.

Xerox (ticker: XRX) saw its business decline significantly during the pandemic. With many offices closed, the demand for printers, copies, and related products has plummeted. In the fourth quarter, revenue decreased 21% to $ 1.93 billion. Total annual sales fell by 22.5%.

In announcing the results, the company also unveiled a plan to “raise” three entities as “separate and distinct entities,” including the Xerox software business, its funding arm and the famous Palo Alto research center, Xerox PARC. This has sparked speculation that the company might spin off or sell one or more of these units – but it also creates a feeling that all of them will require higher investment.

On downgrading the stock, Huberty warns that Xerox is facing both structural declines in its addressable market and the need to invest in new markets. “Like many hardware colleagues, Xerox is faced with the puzzle of digesting a shrinking end market while investing in new categories to drive long-term growth,” she wrote in a research report. “Without investment, the Xerox multiple is likely to deteriorate amid deteriorating investor growth prospects, while long-term investments would squeeze profits and likely limit the uptrend in the share price.”

She adds that in a post-Covid hybrid work environment, Xerox faces tougher prospects than most other hardware companies. She advocates a target rating at the lower end of the enterprise hardware group.

Huberty notes that pre-Covid – large, high capacity machines that can print on large sheets of paper – demand for A3 office printers declined in the low single digits as many offices gradually printed less. She sees that this trend is accelerating. “The office of the future will likely be farther away and more digital, which limits the need for large and expensive printing equipment. This means that Xerox’s revenue base is unlikely to recover to pre-Covid levels,” she writes.

She doesn’t think the company’s plans for the software, finance, and research units will change the value equation for the stock.

“As we have seen with both

Hewlett Packard

[HPQ] and

IBM

[IBM]Taking action to sell or spin off companies in the face of declining core revenue has not necessarily resulted in net worth over time, ”she writes. “For example, when HP first announced in 2014 that it would split into two businesses, the company’s total market capitalization was nearly $ 70 billion. Today … the combined market cap of all affiliates is only $ 56 billion, down nearly 20% from the original spin announcement. “

Huberty added, “This tells us that even if Xerox takes steps to unlock” hidden “value, it shows us that value is not guaranteed. Without a growing core business, shareholders are unlikely to reward the stock with a premium multiple.”

Xerox is down 3.1% in the last trade to $ 22.84. The

S&P 500

has increased by 0.5%.

Write to Eric J. Savitz at eric.savitz@barrons.com