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Xerox Banks on Strategic Transformation Program & Buyouts

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Xerox Corporation (XRX - Free Report) has a post-sale driven business model and is currently going through a three-year Strategic Transformation program.

In the first quarter of 2018, the company reported mixed results. 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. Total revenues came in at $2.43 billion, which outpaced the consensus mark of $2.38 billion. However, the top-line figure decreased 0.8% year over year on a reported basis and 4.6% on a constant-currency basis.

Xerox’s earnings surprise history has been impressive, having surpassed the consensus mark in three of the trailing four quarters, with an average beat of 6%. For the second quarter, the Zacks Consensus Estimate has remained unchanged at 92 cents over the past 30 days.

Strategic Transformation Program

Xerox has a track of record strong margins, which it has been attaining through cost and productivity initiatives. In 2016, the company initiated a three-year Strategic Transformation program with an aim to achieve productivity and cost reduction beyond the historical range of $300 to $350 million of annual savings. Targeted areas include delivery, sales productivity, remote connectivity, pricing optimization, supply chain optimization and design efficiency. In the first two years, Xerox achieved more than $1.2 billion in gross productivity gains and cost savings and expects approximately $475 million of additional cost reductions in 2018. The company targets achievement of approximately $1.7 billion in savings over the three-year period.

We believe that the program will help the company improve its earnings and revenues and in turn lift its share price.  The stock has gained 0.1% in the past year compared with the 5% gain of the industry it belongs to.




Post-Sale Driven Business Model

Xerox has a post-sale driven business model that leads to significant recurring revenue and cash generation. In 2017, more than 75% of the company’s total revenues stemmed from post-sale revenues encompassing equipment maintenance, document services, consumable supplies and financing. This business model supports strong cash flows that help the company to make strategic investments and penetrate in markets with high growth potential.

SMB Coverage Expansion

Xerox continues to expand its Small and Mid-sized (SMB) coverage through distribution acquisitions. In 2017, the company acquired Ohio-based multi-brand dealer MT Business Technologies an, and two other multi-brand dealers in North and South Carolina and Iowa. These acquisitions opened up market opportunities for the company in large metropolitan regions. Moreover, the company has significantly expanded internationally, with a footprint across approximately 160 countries. We believe expansion of SMB coverage will help Xerox improve its top line going forward.

Zacks Rank & Other Stocks to Consider

Xerox currently carries a Zacks Rank #2 (Buy). Other top-ranked stocks in the broader Business Services sector include Automatic Data Processing (ADP - Free Report) , The Dun & Bradstreet Corporation (DNB - Free Report) and TransUnion (TRU - Free Report) . While Automatic Data Processing and Dun & Bradstreet currently carry a Zacks Rank #2, TransUnion sports a Zacks Rank #1. You can seethe complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The long-term expected earnings per share growth rate for Automatic Data Processing, Dun & Bradstreet and TransUnionis is 11%, 4.5% and 10%, respectively.

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