Can Xerox (XRX) Spring A Surprise This Earnings Season?

Xerox Corporation (NYSE:XRX) is scheduled to report second-quarter 2016 results before the opening bell on Jul 29. In the last reported quarter, earnings missed the Zacks Consensus Estimate by a penny. Over the trailing four quarters, the company delivered a positive average earnings surprise of 2.68%, beating estimates twice.

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

Key Factors in the Second Quarter

In the soon-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. Additionally, under the Document Technology segment, Xerox introduced nine new products, reconfirming its position as the leader in market innovation.

The company also unveiled the names of the companies to be formed following its split into two publicly traded entities. Its Business Process Outsourcing (BPO) firm would be renamed “Conduent Inc.” while its Document Technology (DT) division would retain the Xerox brand name.

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 $600 million across all segments.

When combined with savings from cost streamlining actions currently in process, 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.

Meanwhile, the company announced the availability of its Dokmee Capture Scanner software integrated in its DocuMate Scanners, allowing office workers to directly export scanned or digital files to Xerox DocuShare 7, an enterprise content management platform. The combination efficiently converts a large backlog of files into business intelligence. This launch is likely to give a boost to the company’s top-line growth.

However, Xerox is expected to feel some impact of the Brexit fallout as 5% of its total revenue reportedly comes from the U.K. However, Xerox has no manufacturing facilities in the UK as the last remnants of research, development, and engineering (RD&E) were outsourced a couple of years back. Brexit could result in higher tariff and non-tariff barriers for trade between the U.K. and the European Union. Considering the trade relations Xerox has with the U.K., this could lower the productivity of the company.

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.

Alongside, Xerox has been grappling with slow demand in its printing business for years, while its attempts to leverage the business process outsourcing market failed to lend growth momentum to the company’s operations. The company also endured a number of slip-ups in its Medicare and Medicare information services for several government agencies across the U.S.

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 25 cents.

Zacks Rank: Xerox’s Zacks Rank #3, when combined with a 0.00% ESP, makes surprise prediction difficult.

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:

ONE Gas, Inc. (NYSE:OGS) has an Earnings ESP of +12.50% and a Zacks Rank #3. The company is expected to report second-quarter results on Aug 1.

PetroQuest Energy Inc. (NYSE:PQ) has an Earnings ESP of +15.09% and a Zacks Rank #2. The company is expected to report second-quarter results on Aug 1.

Antero Resources Corp. (NYSE:AR) has an Earnings ESP of +400.00% and a Zacks Rank #2. The company is expected to report second-quarter results on Aug 2.