“The Next Apple? … This Decision Could Change Your Life”

by Travis Johnson, Stock Gumshoe | August 14, 2013 11:29 am

"Back from the Dead" company teased by Forbes Investor

Whenever I’m away from Gumshoe Manor for any length of time, I come back and have to hoe the teaser fields for quite a while just to hack down the hype and promises that crept into our lush mountainside gardens while I traveled — and this week is no different, I leave the field looking lovely, I come back and it’s choked with promises of the next great portfolio doubler, the next Berkshire Hathaway, the photos of the newsletter writers’ yachts and Bentleys …

… and, in the one I pulled out to look at today, the promise, again, of “The Next Apple”

I’m still a little hung up on the last Apple (AAPL)[1], the most talked-about stock in the world at any given moment, and it’s still the top holding in my personal portfolio most of the time (and it’s in the news and rising again lately because Carl Icahn[2] has set his sights on them and talked up an even larger share buyback), but I’m always game to hear about the next world-changing stock. So who is it?

Well, the teaser pitch comes in from a newsletter I’ve never covered before — Forbes[3] Investor, which is helmed by Taesik Yoon[4] and which, according to Mark Hulbert, has had a very good year (up more than 50%) but has trailed the market over the last 3, 5 and 10 years. Yoon also edits Forbes’ Special Situation Survey[5], which has a much better long-term record — for whatever that’s worth.

And he’d like us to sign up for his newsletter in order to learn about this turnaround stock that’s giving us the “Perfect Time to Buy.” So what is it?

Well, we’re not going to plunk down $99 or $399 (depending on whether your ad had the “on sale” price) for this newsletter to find out — but we’re happy to sift through the clues for you and give you the answer for the low, low price of, well, nothin’. So let’s jump on those clues:

“Much like Apple in the late 1990s, the company I want to tell you about next was headed straight for the corporate Pearly Gates.

“Throughout the 1960s this company was a formidable business legend. Some say it created the single–most successful commercial product in U.S. history. On the strength of this one product alone it built a billion–dollar business.

“It even reached that elusive pinnacle of branding, where its product name turned into a verb (think “Google” or “photoshop!”).

“But, as often happens, management became complacent. They took their eyes off the prize and the company fell badly behind the competition throughout the 1980s and 1990s.”

That will be enough to have a few nimble-minded Gumshoers guessing — and guessing correctly, probably, given the unusual level of intelligence (and attractiveness) among the great Gumshoe readership. But let’s not spoil the fun, what are the rest of the clues?

The promise is that they’re on a comeback:

“Along came the Internet and the digital age…and the writing was on the wall: this one–time corporate darling was a dinosaur on the verge of extinction.

“But (and this is the important part) thanks to the aggressive and very forward–thinking CEO who took over the reins in 2009—ALL THAT HAS CHANGED.

“Today, much like Apple in the early 2000s, this company is about to shock the world with one of the most stunning comebacks in U.S. corporate history.”

The spiel is that the CEO’s big decision to sell services as well as their traditional business equipment will “change your life” — here’s how the ad puts it:

“She decided that instead of simply providing her customers with its one (albeit indispensible) piece of business equipment it would begin to sell business services as well.

“In announcing the news she said, ‘This transformation is earth-shattering for our company.'”

And then we get some clues that make the Thinkolator’s job very easy this time around:

“One of the first things this go–getter CEO did to turn her vision into reality was to complete a bold $6.4 billion acquisition of a key business process outsourcing (BPO) and IT services provider.

“The company:

• Manages the infrastructure, billing and customer service for many state–run E-ZPass programs
• Provides the installation, ongoing management, and back–office infrastructure for those unpopular red–light cameras that are popping up in dozens of states nationwide
• Operates the entire behind–the–scenes infrastructure for the Medicaid program in the state of California.
• Helps higher education institutions, such as Notre Dame, with everything from enrollment management to loan and HR services
• Data–mines hospital records at many institutions to detect hospital–acquired infections before they spread, as well as to help streamline their operations
• Works with cities nationwide to help them adjust transit schedules, the price of parking, and traffic flow patterns in order to become more ‘green.'”

There’s also some more chatter about what this company is pushing forward on in its R&D department — not only new services, but advancements in 3D printing, silver[6] circuit printing, etc.

And Yoon says that this is “The Perfect Time to Buy” because the stock is trading for only 8X current year earnings estimates — Wall Street is not giving them credit for being more than an office equipment company.

So who is it? Yes you guessed right: This is Xerox (XRX)[7]

I own shares of Xerox, and featured them as an Idea of the Month stock for the Irregulars back in March when it was being teased by Tom Dyson[8] (if you’re a paid member, you can see my past notes about Xerox here, I’ve bought it a couple times now). I also owned Xerox too early back in 2010 and sold the shares when they were weak in 2011, before they had really settled in with their dividend increases and stock buybacks that have buttressed the price.

Xerox is a large but not huge company (market cap around $12 billion, plus $7 billion in debt) and is very reasonably priced — it’s up a bit recently so it’s now trading for about 12X trailing earnings and 9X forward earnings, and while they do depend on equipment sales, including new color printers and copiers that continue to become more advanced, they are expected to grow primarily through services. That’s a tough business, with sometimes tight margins as they compete with the likes of IBM and HP and the other big business services and IT services companies, but they do also have a massive global installed base of customers for their printing and imaging systems — including lots of relatively small customers (by IBM standards) that may give them a good base for upselling.

I changed my mind about Xerox and started buying because I like what management is doing — managing the debt well, doing very large buybacks when the stock is priced down around book value (it was below book for a while, it’s not any more), and beginning what I expect to become a consistent string of annual dividend increases. Tom Dyson teased them as the “next IBM,” and that’s the dream — transitioning from the lower-margin part of the printing and copying business and into recurring service contracts that allow them, with a tight eye on costs, to improve margins. It’s far from being a guaranteed success, but they’re pretty early in the turnaround after buying Affiliated Computer Services back in 2009 for $6.4 billion — ACS is where much of the business process outsourcing work comes from, and it’s a stock that I actually considered several years earlier because of their strong position in all those recurring, growing businesses like red light cameras and automated toll lanes. Right now, there’s plenty of opportunity in many different kinds of businesses (including pensions and investing — Xerox just bought a small Canadian pension software company this week), but I think the most compelling growth story among Xerox’s business services divisions is in health care — healthcare[9] is not much more than 10% of their service revenue, but it’s likely to grow quickly as the rolls of insured and the role of government in healthcare both increase. That’s also part of the rationale behind Citigroup’s upgrade of XRX this week that bumped the shares up a few more percent.

I don’t personally expect XRX to shoot out the lights with growth, and I’ve nibbled cautiously at these higher prices but might add more on dips in the future – the company still has plenty of debt (though much of it is tied to leased equipment in the hands of their customers, so it’s not as scary as it might look at first glance) and plenty of challenges to face, but I’m looking for Xerox to be a slow grower and a good dividend-compounding investment for a long time … and you never know, maybe their R&D will go beyond improvements in their core businesses and allow them to commercialize something far more dramatic along the lines of the silver or 3D printing technologies that were teased (they’re pushing forward on flexible printed circuits [10]now, for example). Xerox has certainly been known to create dramatic innovation before — the Xerox PARC research center brought us the computer mouse and the laser printer and ethernet networking, and PARC is now an independently managed subsidiary of Xerox that does both contracted R&D and their own work for future Xerox products and services today.

Sound like your kind of stock? Let us know what you think with a comment below.

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