The future of Xerox (XRX, Financial) is somewhat fragile due to intense competition from mobile devices that serve as an alternative to print. In order to face the future, Xerox needs to expand its offering in managed print services; otherwise the future growth of the company will be compromised.
Several phenomena like digitalization of documents, single printing devices (smartphones and tablets) and lower volumes of printers in offices are behind the company's principal risks. Xerox’s separation of its business (printing equipment and services operations) and the cost-cutting plans will impact positively by 2019.
EPS was below analysts' expectations
The company´s first-quarter 2017 GAAP earnings per share (EPS) from continuing operations was 2 cents while adjusted EPS was 15 cents, excluding certain items. EPS misses consensus by 1 cent. During the trimester, the company’s earnings were reduced by 3 cents due to a charge related to its equity investment in Fuji Xerox. In the period, revenues were $2.45 billion, down 6.2% when compared to the first quarter of 2016 and 42.8% on a year-over-year basis.
When looking at the cashflow statement, we can appreciate that Xerox generated cashflow from operating activities of $190 million and ended the period with a cash balance of $1.05 billion. Moreover, the company continues using its strong free cashflow to return $87 million in dividends to shareholders and repaid $1.30 billion of debt. For the full year Xerox reiterated its guidance of GAAP EPS in the range of 44 cents to 52 cents and adjusted EPS ranging between 80 cents and 88 cents per share. Cash generation will be between $700 million and $900 million and free cashflow from continuing operations of $525 million to $725 million in 2017.
Relative valuation
The price-sales (P/S) ratio helps investors see if a stock is undervalued or overvalued when compared to its peers. The ratio is close to a two-year high, indicating a strong market price and maybe a strong company, too.
Hedge funds moves
Barrow, Hanley, Mewhinney & Strauss initiated a new position in Xerox with 10,749 shares. Joel Greenblatt (Trades, Portfolio) further increased his position in the stock by 2,305% to $3.6 million in the company's latest filing. Murray Stahl (Trades, Portfolio) remains bullish on the company as evidenced by its increased position in the company's shares to 56,625 shares.
Jim Simons (Trades, Portfolio) and Manning & Napier Advisors Inc. increased their stakes in Xerox by 2.56% and 14.1%. Simons' stake is now worth $85.9 million, and he is in the five largest shareholders with Carl Icahn (Trades, Portfolio) (99.03 million shares), Anand Parekh (15.24 million shares), Cliff Asness (12.92 million shares) and John Overdeck and David Siegel (7.37 million shares).
On the other hand, Paul Tudor Jones (Trades, Portfolio), Dodge & Cox and Jeremy Grantham (Trades, Portfolio) decreased their positions by 74.3%, 23.53% and 21.62%.
Final comment
Xerox is shifting to a new business model and expects the business services segment to fuel its revenues. The decrease in hardware as well as print spending represents major risks for the company.
Disclosure: Author holds no position in any stocks mentioned.
