Author Archives: Scalper1

Xerox Stock Rebuilds; Q1 EPS Rise Expected, But Not Better Revenue

Take your eye off iconic copier maker Xerox ( XRX ) for too long — heck, Xerox stock had done little more than fall since December 2014 — and you would have missed its run-up to Tuesday’s eight-month high at 11.39, up 34% since touching a nearly three-year low in January at 8.48. Xerox stock closed Friday at 11.16, flat for the session. Credit Suisse analyst Kulbinder Garcha doesn’t see much upside potential, giving Xerox a 12-month price target of 11 and a neutral rating in a research note issued Friday. He does see more first-quarter earnings in Xerox, modeling 1 cent more adjusted EPS than Wall Street’s 23-cent consensus, which would be up 10% from the year-earlier quarter. Xerox is scheduled to release Q1 earnings before Monday’s open. But Garcha sees slightly smaller sales than the $4.24 billion consensus of analysts polled by Thomson Reuters. That Q1 consensus would be a 5.1% decline from 2015’s Q1 sales and Xerox’s 17th consecutive quarter of shrinking year-on-year revenue, albeit slower shrinkage than the 8% decline in Q4 and 10% contraction in Q3. The rise in Xerox stock may be tied to anticipation over its imminent split into two companies: the legacy copier/printer/office machine business and the business-process outsourcing (BPO) spinoff. Based on $18 billion in 2015 sales, down 8% from 2014, the business-machine side would wind up with about $11 billion a year in sales, and the outsourcing spinoff about $7 billion, Xerox CEO Ursula Burns said when she announced the split on Jan. 29, concurrent with the Q4 earnings release. Inspired by activist investor Carl Icahn, Burns said the breakup would unlock value in both companies. Icahn would get three seats on the new BPO board, while Xerox would get six. BPO sales, grouped currently as services under Xerox, is a “show me story,” Credit Suisse’s Garcha said. “Management is trying to transition the business away from low-margin to more value-added business,” he wrote in a research note. “However, we think management has to show consistent improvement and deliver on results to regain investor confidence.” Garcha anticipates a Q1 decline of 5.4% to $2.4 billion in services revenue. As for the so-called “document technology” core hardware, software and document management businesses, Garcha estimates that about $1.6 billion of Xerox’s annual cost of goods sold are “yen-denominated,” coming from the Fuji Xerox joint venture (75% owned by Fujifilm ( FUJIY )). With the yen up about 9% year to date, foreign exchange “will impact margins,” but less than was earlier expected, Garcha said. For Q1, Garcha forecasts document tech segment revenue fell 12% to $1.6 billion. Not all of Xerox outsourcing will be part of the BPO spinoff. Document outsourcing, which fell 2% to $852 million in Q4 revenue, will stay with the larger portion of the split, a Xerox spokesman told IBD. Effective April 1, Xerox borrowed $1 billion unsecured from a consortium of seven banks to be repaid within a year or upon execution of the spinoff, whichever comes first. Xerox says the spinoff should be complete before year-end. With a market cap of $11.3 billion, Xerox is the fourth-largest member of IBD’s Computer-Hardware/Peripherals industry group, following Canon ( CAJ ), the newly reorganized HP Inc. ( HPQ ), and Fujifilm. Xerox carries a middling 66 IBD Compositing Rating. Its formidable BPO rivals, Cognizant Technology Solutions ( CTSH ) and Infosys ( INFY ) rate better, with CRs of 75 and 80, respectively.

Valeant’s Latest Acquisition Target: Perrigo’s CEO?

Shares of Valeant Pharmaceuticals International ( VRX ) rose sharply and fellow specialty drugmaker Perrigo ’s ( PRGO ) fell Friday on reports that the former is about to hire away the latter’s CEO. Late Thursday, the Wall Street Journal quoted anonymous sources saying that Valeant is hiring Joseph Papa if it can get Perrigo’s board to void a noncompete clause in his contract. On Friday morning, Perrigo issued a brief statement saying that it would not comment on “speculation,” which is the only official word from either company so far. Valeant has been hunting for a new CEO since March 21, when activist investor William Ackman moved to the board and tried to order the company’s growing chaos. The stock lost more than 80% of its value since a scandal related to a pharmacy partner broke last September, forcing Valeant to strike a new distribution deal with Walgreen Boots Alliance ( WBA ) that was accompanied by across-the-board price cuts. A disastrous Q4 report and guidance cut, along with an internal investigation that accused former CFO and current board member Howard Schiller of misconduct, eventually turned even bullish analysts against Valeant’s management. Papa, meanwhile, has run Perrigo for 10 years and has a largely successful track record. Under his watch, the company’s revenue has more than tripled, the stock has climbed eightfold, an inversion deal moved headquarters to low-tax Dublin, and Mylan ( MYL ) attempted a hostile takeover that Perrigo successfully fought off. IBD Take: Perrigo was once a hot stock, but not lately. Learn why in IBD Stock Checkup Perrigo’s once-steady profit growth has gotten uneven in the last couple of years, however, and the stock has declined more than 40% since its Mylan-induced high last April. It currently holds a mediocre IBD Composite Rating of 40. This change has led some analysts to worry about the implications of Papa’s departure for Perrigo. “Papa has become the face of Perrigo during his long tenure as CEO,” wrote Jefferies analyst David Steinberg in a research note. “However, with the exception of CFO Judy Brown, the company’s other executives — including John Hendrickson, who was appointed President in Oct. 2015 — are largely unfamiliar to the investment community. “Further, the timing couldn’t have been more inopportune. Mr. Papa is potentially departing prior to the announcement of Q1 results, and this follows a string of difficult quarterly financials — particularly in the company’s flagship consumer business.” Guggenheim analyst Louise Chen agreed, noting that Perrigo is widely expected to miss Q1 estimates and lower its guidance. “There has been debate about senior management change at Perrigo, but we don’t think the Street was thinking that it would actually happen or be this soon,” Chen wrote. Perrigo stock was down 5.8% in late-afternoon trading on the stock market today , near 121, after hitting its lowest level intraday since August 2013. Valeant stock was up 7.7%, near 36.