We have lowered our long-term recommendation on
) to Underperform from Neutral due to the lackluster performance of
the company's Technology business. With the sluggish economy still
recovering, Xerox may face more headwinds going forward.
Advancements in information technology have replaced traditional
means of sending and storing information by digital media. As a
result, Xerox and other document industry firms are bearing the
brunt of a slowdown in demand for paper-related systems and
Xerox also faces stiff competition from other players in the
industry such as
). Moreover, they are broadening their product portfolio and global
presence in almost the same way as Xerox.
Xerox posted mixed results in the second quarter of 2012, with
adjusted earnings of 26 cents a share which was in line with the
Zacks Consensus Estimates but lower than the year-ago quarter by a
penny. Revenues declined 1% (up 1% in constant currency) year over
year to $5.54 billion, missing the Zacks Consensus Estimate of
The company anticipates that the economic downturn will further
take a toll on its businesses and has subsequently lowered its
full-year earnings outlook. Xerox now expects adjusted earnings
between $1.07 and $1.12 per share, down from its earlier projection
of $1.12 to $1.18.
However, Xerox is making positive moves in its government
healthcare, financial services and retail, travel and insurance
businesses. In addition, new partner print services offerings and
new signings were other positive takeaways from the recently
However, we believe that economic weakness in Europe and intense
competition from its peers might affect the company's operations.
We are also concerned about its rising debt level, which stood at
$9.2 billion as of June 30, 2012, compared with $8.6 billion as of
December 31, 2011.
Our long-term Underperform recommendation on Xerox is backed by
a Zacks #4 Rank, reflecting a short-term (1 to 3 months) Sell
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