STAMFORD, Conn., Oct 23 (Reuters) - Xerox Corp. is poised for sustained earnings growth because of its solid inroads into the digital technology world, while keeping its operating expenses under control, analysts said Thursday.
"Based on new product introductions in both color and digital black-and-white, Xerox's product line has the best sales momentum that we've seen in years," said Jack L. Kelly, managing director at Goldman Sachs.
"The company's operating expenses are being held in check, and that should continue to help improve the earnings over the long term," said Wendy Abramowitz, analyst at Argus Research.
Xerox said earlier Thursday that its third-quarter earnings per share rose by 29 percent to $0.88, in line with First Call analysts' consensus estimates.
Its revenues grew by nine percent pre-currency to $4.4 billion, driven by 21-percent growth in equipment sales and continued excellent growth in document outsourcing, Xerox said.
Xerox stock was down 1-10/16 to 85-11/16 on volume of 776,700 shares shortly after 1500 EDT.
Prudential Securities analyst Alex Henderson said he was boosting his earnings forecasts for Xerox.
"We're taking our earnings estimates up from $3.95 to $4.00 this year," Henderson said. "Next year, (up) from $4.55 to $4.60, and for 1999, from $4.95 to $5.05."
"The 21-percent equipment sales growth is superb, particularly with very good sales in the high-end segment of the marketplace," Henderson said.
"When you put all of that together -- the continuation of the very strong digital product line, the fact that it's not resulting in declining black-and-white light lens business, and the strength of their color business... -- you've got all the pieces necessary for a very strong fourth quarter and 1998."
Analysts also noted that Xerox's selling, general and administrative (SGA) expenses were 29.4 percent of revenue in the quarter, down by 0.8 percent over the 1996 third quarter.
"One of their main challenges will be to keep a good control on their SG&A standing," Abramowitz said. "That's something that was a problem last year. They're doing a pretty good job with it this year, but they need to do a little bit more there."
Analysts said they expected Xerox to complete its previously announced exit from the insurance industry by the end of the year, and then step up its stock buyback program.
Long-term worries for Xerox will be fending off increased competition from Japanese manufacturers and Hewlett-Packard Co <HWP.N>, analysts said.
"Printers and copiers have already collided at the low end," said Kelly. "The HP that's sitting on your desk also does six copies a minute... As printers become faster, they become more like copiers, and that's obviously the strategy that HP is trying to pursue. On the other hand, we see Xerox getting more into the printer business. So I think these two companies will be battling it out more and more, and that's a long-term issue I would worry about."
Xerox is successfully reinventing itself as a digital technology pioneer, said Kristy Holch, analyst at InfoTrends Research.
"They have some very good technology in character-recognition (software)," she said. "The industry is certainly going in the direction of electronic documents, and I think Xerox is moving in the right direction."
"The (worldwide) copier market is rather flat, so moving into the digital world, and with digital multi-function products, is definitely a growth area," Holch said.
23:19 10-23-97
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