In this article, let's take a look at Xerox Corporation (XRX, Financial), a $14.61 billion market cap company, which is a media and entertainment conglomerate that has diversified global operations in theme parks, filmed entertainment, television broadcasting and consumer products.
Analyzing quarter results
Xerox, the leading service provider for back-office business processes and health-care solutions, operates in three segments: document technology, business services and other. In the business services segment Xerox expects about two-thirds of sales by 2017 because the company now focuses on this segment.
But quarterly revenue was below analyst's expectations. Among the reasons, we can find the exchange rate effect as a primarily reason. With the actual scenario of weaker foreign currencies against the U.S. dollar, the phenomenon affected negatively to “outside operations.” We must not forget that Xerox is a firm operating in more than 160 countries and derived about a third of its revenues from Europe and other areas. Other reasons can be found when looking at its lower printer sales and higher costs. The latter impacted in an adverse way in margins. Gross margin fell by 0.3% to 31.2%, and operating margin was down 1.1% year over year, principally due to the increase in costs associated with regulation issues.
Total revenue decreased by 6.3% to $4.47 billion in the first quarter, below analysts' average estimate of $4.56 billion. On a per-share and excluding the non-recurring items, Xerox earned $0.21, in line with analysts' expectations but below $0.26 per share in the year-earlier quarter.
Negative outlook
The company's margins would be in the range of 8.5% and 9% percent in 2015, lower than its prior expectation of 9 to 10%. Adjusted earnings will be in the range of $0.95 to $1.01, down from its previous forecast. GAAP earnings from continuing operations are expected in the range of $0.77 to $0.83 per share also down from what it was expected before. Finally, revenues are expected to be down 4%.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 16.7x, trading at a discount compared to an average of 88.1x for the industry. To use another metric, its price-to-book ratio of 1.4x indicates a discount versus the industry average of 3.6x while the price-to-sales ratio of 0.81x is below the industry average of 2.78x. This metrics indicate that the stock is relatively undervalued and so subject to a potential buy. But let´s wait until the final comment to see our opinion on this.
Final comment
When a stock price drops much in the market I think it can be a good entry point. But unfortunately, this is not the case. Xerox has entered into promising regions outside the U.S. but the weaker currencies have become the main enemy. On a previous article, we discussed about betting on the dollar. Manning & Napier Advisors, Inc. has reduced Xerox in the first quarter of 2015.
Disclosure: Omar Venerio holds no position in any stocks mentioned
