Moody’s Less Skeptical on Xerox

We have been skeptical of the turnaround at Xerox (XRX). Although the company frequently points to the strong growth in their color and digital product lines, it never seems to be enough for overall sales growth to keep pace with economic growth, because declining older businesses take it all away. What’s more, the suggestion that shareholders treat restructuring charges as one-time events stretches credulity when the company records them every year.

One thing that is beyond dispute, however, is that the company has been reducing its debt burden. And that is likely to lend the company a hand when it comes to borrowing costs, according to a recent Reuters article:

“Since Moody’s changed the ratings outlook to positive in September 2005, Xerox has continued to demonstrate good installation growth throughout its product offering and, with a good product lineup,” Moody’s said in a statement.Moody’s currently rates Xerox’s corporate family and senior unsecured debt at “Ba1,” the highest junk level. An upgrade to investment-grade could significantly reduce the company’s borrowing costs.

Much of the remaining debt at Xerox is funding the company’s customer financing efforts. However, until the company can start increasing its cash flow line, we don’t see the shares as being a compelling value.

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