XEROX CORP. $15 (New York symbol XRX; Conservative Growth Portfolio, Manufacturing & Industry sector; WSSF Rating: Average) is one of the world’s leading makers of printers, copiers and document publishing equipment. Overseas markets account for about half of its sales and profits.

In the three months ended June 30, 2006, Xerox’s earnings fell 35.0%, to $0.26 a share (total $260 million) from $0.40 a share ($423 million) a year earlier. However, the year-earlier quarter included a non-recurring net gain of $213 million. Sales rose 1.5%, to $3.98 billion from $3.92 billion.

The company spends around 5% of its annual revenue of around $16.00 a share on research. It has to write off these costs immediately, which hurts its earnings. But this spending has helped Xerox become the largest maker of black-and-white publishing systems in the United States and Europe.

Xerox is devoting most of its research to new color printing technologies, which generate higher profits than traditional black-and-white systems. Strong sales of its color printers have also spurred demand for document publishing software, maintenance services and ink supplies. In fact, Xerox now gets about 75% of its revenue from service contracts.

Xerox now expects to receive a tax refund of between $400 million and $450 million by the end of 2006. It will not get cash, but will likely receive credits that it can use to cut its future tax bills. That should help offset the impact of Xerox’s new restructuring plan, which will cost $175 million.

The company is using its improving earnings and cash flow to buy back stock. It recently wrapped up a $1 billion buyback program, and authorized a new $500 million program. That should provide support for the stock, which now trades at 14.6 times its likely 2006 profit of $1.03 a share.

Xerox is a buy.