Institutional Wall Street is a funny place. Not only do these highly educated professionals badly misuse words like "catalyst" on a routine basis, but they cannot seem to decide what they really want. Companies are under near-constant pressure to convince the Street that they can find new sources of growth and continually transform their business to stay current with the markets. On the other hand, when a company is actually in the midst of a transformation, a lot of investors flee to the hills and wait for a "catalyst" to return.

That would seem to be the case for Xerox (NYSE:XRX) today. Although the company has gone to considerable lengths to build a process outsourcing and IT outsourcing business to counterbalance the tradition printing/copying business, Wall Street seems to still talk about them primarily as an old-line, slow-growth machinery company.

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The Quarter That Was
To some extent, Xerox is not doing itself a lot of favors in shaking up that image. Although reported revenue growth came in at 42% this quarter, organic growth was more on the order of 2%, as the company's "technology" business (that is, printers, copiers and the like) was basically flat versus last year.

More positively, there was some improvement in profitability. Gross margin came in at 33.6 for the quarter, and operating margin expanded about one full point on a pro forma basis. Better still, bookings in the service business were up 13% on a very difficult comp.

At What Pace Change?
Unfortunately, management guided earnings down a bit for the first quarter and did nothing to really encourage analysts or investors to expect a much better 2011. So even though the company has products like the iGen3 that leave it in good shape as the market moves to digital printing and is also targeting small and mid-sized businesses more than before, it is going to be a slow road to progress.

Ultimately, though, it will have to be the service business that separates Xerox from its usual pool of comparables like Hewlett-Packard (NYSE:HPQ), Lexmark (NYSE:LXK), Canon (NYSE:CAJ) and Ricoh (Nasdaq:RICOY). To that end, investors should remember that the relatively recently-acquired ACS business was no slouch on its own and had more than one suitor before ultimately agreeing to Xerox's overtures.

That is not to say that the transition will be easy. IBM (NYSE:IBM) had to make a similar transition away from "Big Iron" a while back and there were a lot of holdouts that did not believe IBM could ever really reposition itself as both a hardware and service provider. Still, with a strong franchise in areas like automated toll collection, parking system management, and traffic camera management, ACS has a solid base of repeatable business to bunker Xerox's efforts. Of course, Accenture (NYSE:ACN), Cognizant (Nasdaq:CTSH), IBM and HP are waiting here too.

The Bottom Line
Xerox shares are trading at a valuation that suggests Wall Street really does not buy the transformation story yet. Moreover, disappointing guidance for the first quarter and the announcement of the CFO's retirement will not do anything positive for sentiment either. Even if market-average growth is off the table, it seems probable that Xerox can continue to improve its free cash flow margin and any growth would just be so much bonus for patient shareholders. Turnarounds and "reimagings" like Xerox are not for every investor, but patient and risk-tolerant investors are probably looking at a set-up in Xerox shares that offers no worse than stagnant performance and a shot at a considerably better upside. (For related reading about turnaround stocks, see Turnaround Stocks: U-Turn To High Returns.)

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