Inflexible Enterprises

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May 03, 2006
Yesterday's Wall Street Journal had an interview with Anne Mulcahy, CEO of Xerox (XRX, Financial). I'm not mentioning the article because of Xerox itself. I don't see any margin of safety in the stock. Xerox isn't particularly cheap on an enterprise value-to-EBIT basis. The company did earn good returns on equity in the late 90s; but, those returns were largely the result of leverage. So, investors who buy Xerox are betting on a turnaround with limited upside.


Considering the situation at Xerox and the current market valuation, it's hard to say whether the stock is overvalued, undervalued, or fairly valued. Regardless, it doesn't look like an especially attractive opportunity – it seems to be trading within that rather broad gray range that forces me to withhold judgment.


However, the article was worth reading, because it reminded me of a particular problem I had not yet discussed here.