Xerox Downgraded to Underperform

We have lowered our long-term recommendation on Xerox Corporation (XRX - Analyst Report) to Underperform from Neutral due to the lackluster performance of the company’s Technology business. With the sluggish economy still recovering, Xerox may face more headwinds going forward.

Advancements in information technology have replaced traditional means of sending and storing information by digital media. As a result, Xerox and other document industry firms are bearing the brunt of a slowdown in demand for paper-related systems and products.

Xerox also faces stiff competition from other players in the industry such as Canon, Inc. (CAJ - Snapshot Report), Hewlett-Packard Company (HPQ - Analyst Report) and Lexmark International Inc. (LXK - Analyst Report). Moreover, they are broadening their product portfolio and global presence in almost the same way as Xerox.

Xerox posted mixed results in the second quarter of 2012, with adjusted earnings of 26 cents a share which was in line with the Zacks Consensus Estimates but lower than the year-ago quarter by a penny. Revenues declined 1% (up 1% in constant currency) year over year to $5.54 billion, missing the Zacks Consensus Estimate of $5.58 billion.

The company anticipates that the economic downturn will further take a toll on its businesses and has subsequently lowered its full-year earnings outlook. Xerox now expects adjusted earnings between $1.07 and $1.12 per share, down from its earlier projection of $1.12 to $1.18.

However, Xerox is making positive moves in its government healthcare, financial services and retail, travel and insurance businesses. In addition, new partner print services offerings and new signings were other positive takeaways from the recently reported quarter.

However, we believe that economic weakness in Europe and intense competition from its peers might affect the company’s operations. We are also concerned about its rising debt level, which stood at $9.2 billion as of June 30, 2012, compared with $8.6 billion as of December 31, 2011.

Our long-term Underperform recommendation on Xerox is backed by a Zacks #4 Rank, reflecting a short-term (1 to 3 months) Sell rating.