Can Xerox (XRX) Spring a Surprise this Earnings Season?

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Xerox CorporationXRX is scheduled to report third-quarter 2016 results before the opening bell on Oct 28. In the last reported quarter, earnings beat the Zacks Consensus Estimate by 5 cents. Over the trailing four quarters, the company delivered a positive average earnings surprise of 8.77%, beating estimates thrice.

Let's see how things are shaping up prior to this announcement.

Key Factors in the Third Quarter

In the to-be-reported quarter, Xerox continued to work on streamlining its business by selling its Information Technology Outsourcing unit and restructuring its government healthcare business.

The company continues to grow globally through successful acquisitions and disposal of non-core assets. With this divestiture of Information Technology Outsourcing business, Xerox intends to refocus on its Document Outsourcing (DO) businesses and other high-margin business services to offset the decline of the document printing business. In the last quarter, Xerox announced its plan to split its BPO business from its Document Technology and DO business. The separation will help Xerox in segregating its hardware operations and its services business, with each functioning as an independent, publicly traded company. The BPO Company is expected to focus on revenue growth, margin expansion and disciplined investments in attractive growing markets. Also, the Document Technology company is expected to be the global leader in the document management and document outsourcing market going forward. Through diligent cost discipline, this business is expected to generate strong cash flows that will help the company to make strategic investments, and penetrate the higher growth markets. The separation is expected to be completed by the end of 2016.

Xerox is focused on reprioritizing its investments and accelerating restructuring actions to improve revenue and margin. As part of the restructuring, Xerox has decided to execute a three-year strategic transformation program which will target incremental savings of $700 million across all segments. When combined with savings from cost streamlining actions currently in progress, Xerox is aiming to realize cumulative cost reduction of $2.4 billion over three years. Xerox also remains committed to its five-plank strategy that is centered on portfolio management, global growth, cost transformation, operational excellence and analytics.

During the quarter, the company appointed Brian Webb-Walsh as chief financial officer (CFO) of Conduent Incorporated, upon completion of the separation. Brian has nearly twenty years of experience with Xerox, which will help the company improve its top-line growth going forward.

The company expects third-quarter 2016 GAAP earnings to be in the range of 14-16 cents per share and adjusted EPS in the range of 26-28 cents. For 2016, Xerox reiterated its earlier guidance and continues to expect adjusted EPS in the range of $1.10 to $1.20 per share. Cash flow from operations is expected between $950 million and $1.2 billion and free cash flow within $600 to $850 million.

However, a significant portion of the company's revenues are generated from operations outside the United States. With modest revenue coming from the U.K., Xerox is expected to be a high-profile victim of the Brexit fallout. Xerox has a significant number of manufacturing and engineering facilities in the U.K. The company has also high pension obligations in the U.K. Pension Plan for salaried employees. Consequently, Xerox is likely to be stifled by the renegotiated deals and restrictions imposed on trade with other European Union members. Brexit could further result in higher tariff and non-tariff barriers to trade between the U.K. and the European Union, lowering productivity of the company. These undermine the long-term growth potential of the company to some extent. In addition, continuing appreciation of the U.S. dollar with respect to other currencies might weigh on Xerox's international revenues and margins. The company garners a major portion of its aggregate revenues from Japan, and thus the currency headwind is likely to have a significant impact on upcoming results.

XEROX CORP Price and EPS Surprise

XEROX CORP Price and EPS Surprise | XEROX CORP Quote

Earnings Whispers

Our proven model does not conclusively show that Xerox is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. Unfortunately, this is not the case here:

Zacks ESP: Xerox has an Earnings ESP of 0.00%, as the Most Accurate estimate is in sync with the Zacks Consensus Estimate of 27 cents.

Zacks Rank: Xerox's Zacks Rank #3, when combined with a 0.00% ESP, makes surprise prediction difficult. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

Please check our Earnings ESP Filter that enables you find stocks that are expected to come out with earnings surprises.

Note that we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

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

Bristol-Myers Squibb Company BMY has an Earnings ESP of +3.08% and a Zacks Rank #3. The company is expected to report third-quarter results on Oct 27.

Enterprise Products Partners L.P. EPD has an Earnings ESP of +3.33% and a Zacks Rank #3. The company is expected to report third-quarter results on Oct 27.

Aetna Inc. AET has an Earnings ESP of +1.49% and a Zacks Rank #3. The company is expected to report third-quarter results on Oct 27.

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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 Nasdaq, Inc.

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

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