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Xerox's Earnings to Rise, But Still Depressed

Richard Widows

Xerox(XRX Quote), the document-equipment company whose stock has fallen three times as much as the S&P 500 this year, isn't quickly recovering from a profit slump. Just on Friday, it lowered its first-quarter earnings expectations.

Xerox said EPS will be 3 cents to 5 cents a share, compared with previous guidance of 16 cents to 20 cents.

Before the announcement, TheStreet.com Ratings' quantitative model had assigned Xerox a "risk grade" of D on a scale from A-plus to E-minus. The model, programmed to conduct an objective analysis of a company's valuation metrics, financial situation, analyst consensus expectations of growth as well as the volatility of its stock price, has Xerox's "overall grade" as a C, equivalent to a "hold" recommendation.

As can be seen in the accompanying table, the consensus among analysts is that Xerox's earnings per share, excluding extraordinary items, will recover from a depressed 26 cents in fiscal 2008 to 95 cents this year and $1.03 in 2010. But that will still leave the company less profitable than in fiscal 2006, when it netted $1.22.

The stock's meager multiple of 5.5 times this year's estimated earnings per share reflects a lack of confidence by investors in Xerox's ability to maintain earnings growth momentum. The shares have plunged 46% so far in 2009, compared with a decline of 15% for the benchmark S&P 500.

Chairman and CEO Anne Mulcahy on Friday pledged to lower the firm's debt level, which at the end of 2008 stood at a burdensome $9 billion, close to 1.5 times the firm's equity of $6.2 billion.

Xerox blamed the slump in the global economy for its diminished prospects. It said 6 cents of the reduction in first-quarter net will be the result of Xerox's share of Fuji Xerox's restructuring and lower-than-expected profit at Fuji Xerox. It added that the balance of the reduction will result from an industry-wide slowdown in technology spending, putting pressure on revenue and earnings.

Xerox's total revenue in January and February declined 18%, including a 5-point currency impact, largely due to lower sales of equipment and printer-based supplies.

The company said it's on track to deliver $250 million in savings this year from previous restructuring actions, and has identified an additional $300 million in cost-and-expense reductions that will flow through to earnings and cash generation.