Xerox Corporation (XRX) announced that it would release its results for the third quarter of 2011 before the market opens on October 25, 2011. Norwalk, Connecticut-based Xerox realized earnings per share of 27 cents in the second quarter, which was higher than the Zacks Consensus Estimates of 24 cents per share. In the upcoming quarter, the Zacks Consensus Estimate for Xerox is pegged at a profit of 25 cents per share, reflecting an annualized growth of 12.99%. The downside potential of the estimate, essentially a proxy for future earnings surprises, is 4.00%.
With respect to earnings surprises, the company outdid the Zacks Consensus Estimate in the trailing four quarters. This is reflected in the average earnings surprise of 7.66%, implying that the company has beaten the Zacks Consensus Estimate in each of the last four quarters.
Second quarter Recap
Revenues increased marginally by 2% year over year to $5.61 billion, but failed to beat the Zacks Consensus Estimate of $5.62 billion. Lower sales (down 4% year over year) negatively impacted revenues, despite a 5% growth in revenues from service, outsourcing and rentals.
Gross margin in the quarter declined slightly to 33.4% from 34.8% in the prior-year quarter, whereas operating margin rose to 10.4% from the year-ago level of 10.1%.
Revenues in the Technology segment remained almost flat at $2.55 billion, driven by a 3% year-over-year decline in equipment sales, arising from the challenging supply chain scenario in Japan. The segment’s profit increased $27 million to $300 million from last year.
Revenues in the Services segment increased approximately 6% to $2.67 billion from $2.53 billion reported in the year-ago quarter. This was attributed to remarkable improvements in each of its business process outsourcing (BPO), information technology outsourcing (ITO) and document outsourcing (DO) services.
Revenues in the Other segment declined 8% to $390 million from $424 million a year ago. However, the segment’s loss narrowed down to $73 million from the year-ago loss of $93 million.
Xerox anticipates GAAP and adjusted EPS of 20 cents–22 cents per share and 24 cents–26 cents per share, respectively, for the third quarter of 2011. For full-year 2011, the company expects GAAP earnings between 91 cents and 96 cents per share and adjusted EPS in the range of $1.07 per share to $1.12 per share. However, the company reduced its full-year operating cash flow guidance to $2 billion–$2.3 billion.
Estimate Revisions Trend
Earnings estimate for the third quarter of 2011 is currently pegged at a profit of 25 cents per share. The analysts believe that the recent acquisitions will reap benefits for Xerox but are still cautious on the stock given the intensifying competition.
Agreement of Estimate Revisions
Out of the 7 analysts covering the stock for the third quarter, only one has downgraded the stock in the past 30 days. However, none of the analysts has upgraded it in the given period.
Magnitude of Estimate Revisions
Following the second quarter earnings release in July, third quarter earnings per share was projected at 25 cents and is maintained there since then.
Our Take
Xerox is a highly recognized brand globally with an estimated brand value of $6.43 billion. The company is highly focused on expanding its business globally based on its well knitted distribution network. The company has also identified huge opportunities in the domestic markets as well as in the emerging markets for expanding its business.
In order to seize the opportunities in the emerging markets, Xerox partnered with Trigon last year to offer its authorized products for the first time in the UAE. The company also appointed Seven Seas, a UAE-based systems integrator and reseller, as its channel partner with an objective to expand its indirect channel business and boost its market share.
The company has also taken similar initiatives in the domestic market as well. The recent acquisitions by GIS testify the fact. Apart from Premier Office Equipment, GIS also acquired Illinois-based United Business Solutions and Pensacola-based Florida Imaging & Network Systems with the same objective.
With all these agreements, contracts and acquisitions, Xerox aims to capitalize on the growing market to strengthen its financial performance in the upcoming quarters.
However, growing competition, advancement in IT, reduced demand for papers and other document equipments may emerge as potential headwinds for the company going forward. The company’s key competitors include Canon Inc. (CAJ) and Pitney Bowes Inc. (PBI).
Thus, the shares of Xerox Corp. are maintaining a Zacks #3 Rank, which translates to a recommendation of Hold for the short term (1 to 3 months) and we reiterate our recommendation of Neutral for the long term (more than 6 months).
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