The Death Of Xerox?
Summary
- I had a speculative buy on this name if the yield hit 3.5%.
- The business is in very rough shape and I discuss the most recent results.
- The company desperately needs a catalyst, which the pending separation may provide.
When I initiated coverage on Xerox (NASDAQ:XRX), I concluded that the stock wasn't dead, and in January, I opined the name was also not "dead money." That is important to reiterate. But this once-stellar blue chip has certainly fallen from grace, big time. I then told you that the company was "not dead yet." But friends, are we approaching the death of Xerox? I mean, it has been struggling for a long time. I suggested on nice dips you could buy simply for the yield and collect the dividend, but growth was nowhere to be found. I had said in my prior work numerous times that we needed to see some improvement in the underlying metrics before I could get behind the name. Well, in the past three months, the stock has moved sideways to higher, but will there be sustained momentum? That is tough to tell, but the name has been downgraded and the most recent earnings were not great.
The truth is that performance has been pitiful of late and is the reason shares have declined. Well here, Q3 shows that there are still declining revenues. Revenue as a whole came in at $4.21 billion, and this missed estimates by $100 million. However, this was also down 5.4% year over year, continuing a string of declining quarters. In addition, the degree of declining revenues seems to be picking up and this is real bad news. Of course, as I have discussed in-depth in other articles, the strong dollar has hurt companies with international businesses.
Thus, we need to look at revenues on a constant dollar basis. Doing so, we still see revenues were down 4% year over year. That is still a huge negative. Revenue from the company's "services" business was $2.4 billion, which was actually up 1% (but down 2% in constant dollars) with margins at 9.2%.
Where the weakness continues is the "document technology" business. Here revenue came in at $1.6 billion, down 9% on an absolute basis or 7% in constant dollars. Margins, however, did improve thanks to cost reductions and productivity improvements. They came in down 0.8 percentage points versus last year, but up 0.5 percentage points from the sequential quarter, at 13.1%.
So revenues declining is never a good thing, but margin improvement is strong. So that means expenses must be under control, right? Well, total costs and expenses were down 10% year over year. That is a positive. Adjusted gross margin and selling, administrative and general expenses were 31.0% and 19.6% of revenue, respectively. Both metrics improved quarter over quarter.
In terms of cash flow, Xerox produced $370 million in cash flow from operations during the third quarter, in line with normal seasonality but was up nicely from the $271 million last year, and ended the quarter with a cash balance of $1.5 billion. Considering revenues and expenses, the company saw earnings of $0.17 per share. Now, we need to factor in some items and in doing so, we see that adjusted earnings came in at $0.27 per share. This actually met estimates.
The bottom line? I'm very much looking forward to the separation and split-up of the company, as Xerox desperately needs a catalyst. It is on life support compared to its once-great status. I continue to be concerned with declining revenues, and although margins widened, they have been pressured heavily this year. More bad news. The company narrowed full-year guidance for adjusted earnings of $1.11 to $1.14 per share from $1.10 to $1.20. The company expects full-year GAAP earnings of $0.45 to $0.48 per share, down from $0.44 to $0.55. It also expects 2016 cash flow from operations of $950 million to $1.2 billion and free cash flow of $600 million to $850 million.
This is a gamble right now. When it yields 3.5%, I would be a buyer from a speculative standpoint and income standpoint only. The company may see new life following the separation.
Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles that are time sensitive. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."
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