Xerox (XRX) is an iconic name in the printing solutions market. Its stock rose as much as 16.2% today after the company reported its earnings beat. Xerox is operating in a declining market as the world moves toward digitization. Its revenue has been declining since 2012 and is expected to decline 6% YoY (year-over-year) to $9.24 billion in 2019.
Despite declining revenue, Xerox stock soared 16% as the company increased its fiscal 2019 EPS guidance to $4.05 from the previous $3.88. It also increased its 2019 FCF (free cash flow) guidance by $100 million to $1.15 billion at the midpoint.
Xerox: Q3 earnings highlights
In the third quarter, Xerox’s revenue fell 6.5% YoY to $2.2 billion, beating the FactSet estimate of $1.9 billion. It earns over 60% of its revenue from services, maintenance, and rentals. It also earns 36% of its revenue from equipment sales and about 3% from consumer financing.
Amid its declining revenue, Xerox increased its adjusted profit margin to 12.1% in the third quarter from 10.9% in Q3 2018. It also increased its adjusted EPS by 27% YoY to $1.08.
Xerox is improving its profitability through restructuring and cost savings. The company started an enterprise-wide initiative called Project Own It to streamline operations and ensure continuous improvement. It is on track to achieve $640 million in gross savings this year. For 2020, the company plans to generate at least $450 million in gross savings.
Higher cost savings improved Xerox’s margins and its cash flows. Its operating cash flow rose 30% YoY to $356 million. Its FCF rose by 35% to $339 million. The company repurchased only $68 million in shares during the quarter.
Xerox has been looking to sell its consumer financing business as part of its restructuring initiative. It also received several bids that offered an attractive premium.
During the third-quarter earnings call, Xerox CEO John Visentin stated that the company decided to retain its consumer financing business. He explained after evaluating this business, the company realized that it can give better returns after optimizing it through Project Own It.
Xerox is using the money saved from restructuring to invest in innovations for adjacent markets. It is innovating in digital packaging and printing, 3D printing, and sensors and services for IoT (Internet-of-Things).
Xerox’s stock performance
Despite declining revenue, Xerox stock rose 77% YTD (year-to-date), outperforming rival HP Inc., which fell 14.1% YTD. Xerox stock rose on the back of rising profitability and cash flow. It is currently trading close to its 52-week high of $36.58.
Only seven Wall Street analysts cover this stock, and they have mixed recommendations for “buy” and “hold” ratings. Looking at its YTD performance, we believe it’s a stock worth holding, as the fourth quarter is seasonally strong for Xerox. Its fourth-quarter EPS is expected to be above $1.00.