Is Xerox (XRX) Likely to Disappoint on Q2 Earnings? - Analyst Blog


Information technology services provider Xerox Corporation ( XRX ) is scheduled to report its second-quarter 2014 results before the opening bell on Jul 25. In the last reported quarter, Xerox's adjusted earnings exceeded the Zacks Consensus Estimate by 4 cents. Let's see how things are shaping up for this announcement.

Growth Factors in the Second Quarter

Xerox expects the Services segment to fetch 66% of its total revenues by 2017, up from 55% in 2013. To achieve this objective, Xerox is focusing more on vertical markets like healthcare. Xerox recently secured an estimated $500 million worth contract to reinstate New York's Medicaid management system, according to a Bloomberg report.

New York's Medicaid program, worth $52 billion, is the biggest in the nation. Xerox's selection as the vendor for the state may open doors to more lucrative opportunities for the document imaging giant, once the other states follow New York's footsteps and revamp their Medicaid payment systems.

The company has already begun to reap huge benefits from the Medicaid Management Information System (MMIS) through its successful implementation and CMS (Centers for Medicare and Medicaid Services) Certification in all the 31-state Medicaid programs. Also, Xerox is looking forward to expand its offerings through inorganic measures to add more clients to its portfolio.

Additionally, during the quarter, Xerox was awarded a $51 million contract to provide South Carolina residents with debit cards to allow them access to food stamps or welfare benefits. Xerox provides card service programs to nearly 25 million people in 29 states, and continued contracts for such services offer a healthy revenue stream for top-line growth.  

Earnings Whispers

Despite focused attempts to restructure its business, our proven model does not conclusively show that Xerox is likely to beat earnings this quarter as it lacks the key ingredients for a success recipe.

Zero Zacks ESP: Expected Surprise Prediction or Earnings ESP , which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is currently pegged at 0.00%. This indicates a likely in line earnings for the shares.

Zacks Rank #4 (Sell): Xerox's Zacks Rank #4 reduces the predictive power of ESP. Note that stocks with Zacks Ranks of #1, #2 and #3 have a significantly higher chance of beating earnings. We caution against stocks with Zacks Ranks #4 and #5 (Sell-rated stocks) going into the earnings announcement. When combined with 0.00% ESP, the Zacks Rank #4 fails to conclusively predict an earnings surprise for Xerox. Rather, the probability of an earnings miss in the soon-to-be-reported quarter is comparatively higher.

Other Stocks to Consider

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

American Capital Agency Corp. ( AGNC ), earnings ESP of +6.06% and Zacks Rank #2 (Buy).

Credit Acceptance Corp. ( CACC ), earnings ESP of +2.39% and Zacks Rank #2 (Buy).

CH Robinson Worldwide Inc. ( CHRW ), earnings ESP of +2.60% and Zacks Rank #2 (Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Business , Earnings , Stocks

Referenced Stocks: XRX , CHRW , AGNC , CACC

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