Xerox remains bearish on subdued second-quarter outlook

Following the announcement of mixed fiscal 2016 first-quarter results, the shares of Xerox Corp. (XRX) declined 13.6% on Monday. The sell-off was spontaneous not only because of unimpressive results, but also due to a weaker than expected second quarter outlook.

During the fiscal 2016 first-quarter, the company’s revenue was $4.28 billion, down 4.2% on a y-o- y basis. The adjusted net income for the first-quarter declined 16.9%, on a y-o- y basis, to $231 million or $0.22 per share. The earnings estimate of analysts was $0.23 per share on revenue of $4.24 billion.

Segment wise, services revenue increased 1% to $2.5 billion, while the document technology revenue declined 10% to $1.6 billion. The decline in the sales of printers and copiers hurt the company’s top line. This is the fourth consecutive year of decline in the sales of printers and copiers.

As pressure mounted from activist investor Carl Icahn, in January, Xerox unveiled a plan to split the documentary technology segment and the business process outsourcing segment into two separate entities worth $11 billion and $7 billion respectively.

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While announcing the first-quarter results, the company reconfirmed the split plan and stated that the process of formation of two independent companies would get completed by this year end. Furthermore, it would cost between $200 and $250 million for completing the division process. Additionally, about $300 million would be required for restructuring and related costs.

For the second-quarter, the Connecticut based company expects adjusted earnings per share between $0.24 and $0.26. The analysts’ earnings estimates currently stand at $0.26 per share. For the fiscal 2016, Xerox anticipates adjusted earnings per share in the range of $1.10 to $1.20. The consensus earnings estimate of analysts’ for the fiscal 2016 is $1.11 per share.

During the second-quarter the company would spend about $100 million for restructuring. The company also stated that it would not repurchase shares this year.

Xerox is trying to slowly shift from hardware to IT service business. However, it is yet to succeed in its transition. Considering the fact that the market would closely monitor, but stay on the sidelines till the split into two companies gets completed, we can fundamentally expect the share price to remain range bound with bearish bias.

The price chart shows that the stock has a major support at 9.64. In the case of an uptrend, the first major hurdle exists at 11. The stochastic indicator is tilted downwards and is below the 50 level. This indicates a further downtrend in the share price. A break below the support will take the stock to 8.

Thus, a binary options trader should purchase a one touch put option contract with a strike price of about $8 or higher. The trade has greater chances of success if the contract expires in the last week of May.

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