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Why Is Xerox (XRX) Down 5.5% Since its Last Earnings Report?

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A month has gone by since the last earnings report for Xerox Corporation (XRX - Free Report) . Shares have lost about 5.5% in that time frame.

Will the recent negative trend continue leading up to its next earnings release, or is XRX due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Xerox Earnings Miss Estimates in Q1, Revenues Beat

Xerox Corporation reported mixed first-quarter 2018 results, wherein the company’s bottom line lagged the Zacks Consensus Estimate but the top line surpassed the same.

Adjusted earnings per share of 68 cents were up by a penny from the year-ago quarter but lagged the Zacks Consensus Estimate by 2 cents.

In January 2018, Xerox and FUJIFILM inked a definitive deal worth $6.1 billion to combine the FujiXerox joint venture with Xerox. Per the deal, Fujifilm will own 50.1% of the combined company.

Xerox is expected to declare a special one-time cash dividend of $2.5 billion or around $9.80 per share (based on the shares of Xerox common stock outstanding as of Mar 31, 2018). The special dividend will be paid before the closing and funded by a new borrowing as discussed under “Bridge Facility".

Fujifilm will not be a shareholder of Xerox as of the record date for the special dividend and will not receive any payment.

Revenues

Total revenues of $2.43 billion however beat the Zacks Consensus Estimate of $2.38 billion. The figure was down 0.8% year over year and 4.6% on a constant currency basis.

Equipment sales of $499 million were down 2.7% year over year or 6.4% on a constant currency basis.

Post sale revenues of $1.93 billion were down 0.3% year over year or 4.1% on a constant currency basis.

Operating Results

Gross profit was $970 million compared with $975 million in the prior-year quarter. Total gross margin was 39.8% compared with 39.7% in the prior-year quarter.

Gross margin for Equipment was 32.3% compared with 30.7% in the prior-year quarter. Gross margin for Post sale was 41.8% compared with 42.1% in the prior-year quarter.

Adjusted operating profit was $253 million compared with $270 million in the year-ago quarter. Adjusted operating margin was 10.4% compared with 11.0% in the prior-year quarter.

Total selling, general and administrative expenses declined to $628 million from $634 million in the year-ago quarter. Research, development and engineering expenses declined $11 million from the prior-year quarter to $100 million.

Balance Sheet and Cash Flow

Xerox exited first-quarter 2018 with cash and cash equivalents of $1,398 million compared with $1,293 million at the end of December 2017. As of Mar 31, 2018, long-term debt was $4,811 million compared with $5,235 million as of Dec 31, 2017.

The company generated $216 million of cash from operating activities in the reported quarter compared with $52 million in the year-ago quarter. Free cash flow was $198 million in the reported quarter compared with $160 million in the year-ago quarter.

During the reported quarter, the company returned $67 million in dividends to shareholders.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. There has been one revision lower for the current quarter.

Xerox Corporation Price and Consensus

VGM Scores

At this time, XRX has a strong Growth Score of A, though it is lagging a bit on the momentum front with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is more suitable for value and growth investors than momentum investors.

Outlook

Estimates have been broadly trending downward for the stock and the magnitude of this revision indicates a downward shift. Notably, XRX has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.




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