Xerox's Printing Business Continues To Underperform; Morgan Stanley Downgrades Stock

Morgan Stanley’s Brian Essex expressed concern regarding the ongoing weak performance at Xerox Corp’s XRX BPO and DocTech segments, as well as the continuing restructuring and spin off costs.

Essex downgraded the rating on the company from Equal-weight to Underweight, while lowering the price target from $11.50 to $9.50.

“Limited upside, elevated leverage, deteriorating FCF, and execution risk drive our rating change,” the analyst explained.

Conduent Concerns

Essex believes Xerox’s “Spinco” Conduent, which focuses on the BPO Services business, is facing secular growth headwinds, while stating, “Conduent's exposure to traditional BPO work appears to position the company in the path of headwinds going forward that challenge growth and pricing.”

In the absence of topline growth, the analyst believes that Conduent would need to focus on margin expansion in order to drive shareholder value.

According to a Reuters report, management expects Conduent to achieve segment margin improvement in Q4 2016.

Essex believes the spin would add $2 billion in net incremental leverage to Xerox’s higher multiple BPO business.

Other Concerns

On the other hand, the analyst noted that the company’s restructuring execution has consistently been falling short of expectations.

In addition, a recent survey suggested that the pricing and spending environment would remain difficult for Xerox in 2017, while there were catalysts that could lead an acceleration in free cash flow declines, as compared to the expectations.

Xerox reported mixed results for Q3, with in line earnings but revenue missing expectations.