Xerox Holdings (NASDAQ: XRX) shares powered 12.6% higher through 12:20 p.m. ET on Thursday, despite missing analyst targets for both sales and earnings.
Heading into its fiscal Q4 report, analysts had predicted this office printer company would suffer a steep decline in earnings versus last year -- and they were right. Instead of the $0.89 per-share adjusted profit that Xerox earned in Q4 2022, the company reported just $0.43 per share in adjusted earnings this time around. That was a decline of more than half, and also less money than the $0.52 per share Wall Street had predicted Xerox would make.
Sales performance was a little better. Analysts had forecast Xerox would collect $1.79 billion in sales in Q4; Xerox reported $1.77 billion.
Bad news for Xerox
But wait: That's bad news, right? Xerox missed sales and earnings predictions. Its sales and earnings both went down, not up, in comparison to last year. So why are Xerox shares up, not down, today?
Well, yes, it was bad news. Revenues declined 9% in Q4, and non-GAAP profits dropped 52% year over year. Actual earnings, as calculated according to generally accepted accounting principles (GAAP), by the way, declined even more steeply, falling from $1.24 per share a year ago to just $0.50 per share in Q4 2023 -- a 60% decline.
And yet investors seem to be responding less to Xerox's problems, and more to what Xerox says it is doing to fix these problems. "Last year, steps we took to structurally simplify our business impacted revenue, but led to 170 basis points of adjusted operating margin expansion and laid the foundation for successful execution of our Reinvention," CEO Steve Bandrowczak explained. When complete, this "reinvention" should improve the company's annual operating profits by $300 million or more, returning the company to full-year profitability. For context, Xerox ended both 2022 and 2023 with net losses for the year.
How it started; how it's going
So how is that plan working out for Xerox? Well, they've got the "impacted revenue" part of the plan in the bag at least. Heading into 2024, management is forecasting further declines of 3% to 5% on the top line.
On the plus side, Xerox says it's back to positive profits on an adjusted basis, and expects to earn adjusted operating profit margins of "at least 7.5%" this year. Free cash flow (FCF) is already decidedly positive, with Xerox generating cash profits of $379 million in Q4 2023, $649 million for the full year, and on course for "at least $600 million" in 2024.
With a market capitalization of $2.3 billion and about $3.3 billion in net debt, Xerox stock has an enterprise value of only 8.6 times trailing FCF, and no more than 9.3x forward FCF -- pretty cheap valuations for a stock paying 6.1% in annual dividends.
Now, if only Xerox can complete its turnaround and get revenues growing again, this stock really could end up being a winner.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
