Shares of Xerox Corp. (XRX) were off nearly 20 percent on Friday after the company sharply reduced its profit expectations for the first quarter and a major ratings agency lowered its outlook for the company to negative.
Xerox, the world’s top supplier of digital printer and document management services, said it now expects earnings for the quarter to be in the 3 cents to 5 cents per share range, down from its earlier forecast of earnings of 16 cents to 20 cents per share. Analysts were expecting the company to post earnings of 17 cents per share, according to Reuters Estimates.
The lowering of the company’s rating by Standard & Poor’s to negative means it will cost more to insure its debt. Its credit default swaps widened by 32 basis points to 467 basis points, meaning it would cost $467,000 per year to insure $10 million of debt for 5 years.
An S&P credit analyst said her company expects that the “global economic weakness, reduced information technology spending, and highly competitive industry conditions will pressure Xerox’s revenues, operating earnings, and leverage profile in fiscal 2009.”
Xerox said that revenue has fallen 18 percent in the first two months of the year compared to last year due mainly to lower sales of equipment and printer-based supplies, but also includes a 5 point currency impact.
The drop in earnings per share also includes a 6 cent impact from Xerox’s share of Fuji Xerox’s restructuring and a lower than expected Fuji Xerox profit contribution. Xerox has a 25 percent stake in Fuji Xerox Co., a partnership that sells Xerox equipment in Japan and other Pacific Rim countries.
Xerox chairman and chief executive Anne Mulcahy said that while the company expects enterprise spending on technology to continue to decline this year, “Xerox remains the prominent player in our industry with number one revenue share.”
She continued, “Through our expanded distribution, we’re confident we’ll continue to grow market share even in this challenging environment.” Mulcahy added that the company is expediting further cost savings that will that will help to offset the economic impact on revenue while fueling the company’s operating cash flow.
Though Xerox said it is on track to deliver $250 million in cost savings from previous restructuring actions, and has identified an additional $300 million in cost and expense reductions, investors are taking a wait and see attitude. They remember well the troubles the company had earlier this decade.
Recent comments by major companies such as Nike Inc. and FedEx Corp. suggest this recession is a long way from over and any rebound in earnings isn’t imminent.
This article was written by Jamie Dlugosch, contributor to InvestorPlace Media. For more actionable insights likes this, visit www.InvestorPlace.com.
