Xerox's (XRX) Strategic Efforts Bode Well, Risks Remain

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On Dec 19, Zacks Investment Research updated the research report on diversified electronics manufacturer Xerox CorporationXRX .

Headquartered in Norwalk, CT, Xerox is a leader in the development, manufacture, marketing, servicing and financing of document equipment across the world. The company has presence in more than 160 countries. It offers business process outsourcing and IT outsourcing services, including data processing, healthcare solutions, HR benefits management, finance support, transportation solutions, and customer relationship management services for commercial and government organizations worldwide.

Xerox underperformed the Zacks categorized Business Services industry with an average negative return of 7.0% compared with a 1.1% loss of the latter, over a period of 90 days. Over the same period estimates for the current quarter decreased from 35 cents to 33 cents per share today. Significant slip-ups in its Medicare and Medicare information services for several government agencies across the U.S. have also hurt its overall profitability.

Advancements in IT have replaced the traditional means of sending and storing information by digital media. As a result, Xerox is grappling with decreased demand for paper-related systems and products, while its attempts to leverage the business process outsourcing market failed to lend a growth momentum.

A significant portion of the company's revenues are generated from operations outside the U.S. With modest revenues coming from the U.K., Xerox is expected to be a high-profile victim of the Brexit fallout as it has a significant number of manufacturing and engineering facilities in the country. The company also has high pension obligations in the U.K. Pension Plan for salaried employees. 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 its long-term growth potential to some extent.

However, Xerox continues to grow globally through successful acquisitions and disposal of non-core assets. The company divested its Information Technology Outsourcing business to refocus on its Document Outsourcing (DO) businesses and other high-margin business services to offset the decline of the document printing business. Xerox also announced its plan to split its Business Process Outsourcing (BPO) business from its Document Technology and DO business. The separation will help the company segregate its hardware operations and 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. 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 make strategic investments, and penetrate in higher growth markets. The separation is expected to be completed by the end of 2016.

In order to better adapt to the changing market trends, Xerox is continually shifting its business model by expanding indirect distribution channel and streamlining its supply chain and product portfolio. The company aims to focus on organic improvements and services for the next few quarters

Xerox currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the same industry include SPS Commerce, Inc. SPSC , Exponent Inc. EXPO and Navigant Consulting Inc. NCI . Both SPS Commerce and Exponent carry a Zacks Rank #2 (Buy), whereas Navigant sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

SPS Commerce has a long-term earnings growth expectation of 22.5% and is currently trading at a forward P/E of 138.9x.

Exponent has a long-term earnings growth expectation of 132% and has beaten estimates thrice in the trailing four quarters for an average positive earnings surprise of 9.71%.

Navigant has a positive average earnings surprise of 29.3% for the last four quarters, beating estimates twice.

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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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