Morgan Stanley Likes The Xerox Split, But Downgrades Stock To Equal-Weight

• Shares of Xerox Corp XRX have declined 25.97 percent over the past one year, falling almost to their 52 week low on January 20, at $8.76.
• Morgan Stanley’s Brian Essex has downgraded the rating on the company from Overweight to Equal-weight, while lowering the price target from $13.50 to $12.00.
• Although the announced split of the company would position Xerox for improvement in 2016, Essex prefers to move to the sidelines due to the increased risk in weakness in the Printing segment.

Analyst Brian Essex explained that following a recent review of its external strategic alternatives review, Xerox announced on Janaury 29 that it intended to split the company into two separate entities. One business would focus on the company's growing BPO Services business, while the other would include the legacy Printing and Document Outsourcing businesses.

Although Essex viewed the split as a positive catalyst for the company, he also warned regarding the “incremental risk to a CFO search still in process, initiation of a CEO search for the Services business, financing costs and restructuring initiatives associated with the spin.”

The company reported better than expected EPS for 4Q15, primarily driven by upside in Services margins. However, the total adjusted revenue fell 5 percent year on year, with the performance of the Services business being offset by accelerated decline in Printing revenue.

“We expect the Printing business will continue to weigh on performance as implied by the company's guidance for 2-4 percent y/y constant currency revenue declines in 2016,” Essex said.

The FY16 EPS guidance was higher than consensus, with a large part of the upside being driven by Xerox’s “shift to reporting adjusted numbers to normalize for expected restructuring events.”