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Why Xerox Stock Just Crashed 11%

By Rich Smith – Oct 26, 2021 at 1:37PM

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Supply chain snarls and COVID-19 weigh on sales growth in Q3 -- and Q4, too.

What happened

Shares of IT equipment giant Xerox (XRX) dropped 11.1% through 1:10 p.m. EDT Tuesday. The company reported its third-quarter earnings this morning, beating on earnings, but missing on sales.

Analysts had forecast Xerox would earn $0.44 per share on $1.81 billion in sales in Q3. Xerox beat the earnings estimate with a $0.48-per-share profit -- but missed slightly on sales, reporting $1.77 billion.  

White arrow declining sharply atop a stock tickertape display bathed in red.

Image source: Getty Images.

So what

In addition to falling short of analyst expectations, Xerox's sales objectively declined 0.5% year over year. Management blamed the lackluster results on "a deterioration in global supply chain conditions and the Delta variant, which caused delays in many of our clients' plans to return employees to the workplace."  

Making matters worse, gross and operating profit margins both declined. What saved Xerox this quarter, therefore, was the absence of a tax bill. Instead of paying $29 million in taxes, as the company had to do in Q3 2020, this year the company booked a $4 million tax benefit -- allowing net income to rise in consequence.

On the bottom line, Xerox grew its profits 17%.

Now what

Don't be lulled into complacency by the upward tilt in earnings, however. All is not well at Xerox. As management warned, the same factors that depressed sales in Q3 have also forced Xerox to lower its revenue guidance for the rest of this year. In 2021, therefore, Xerox now expects sales to be only $7.1 billion -- versus the nearly $7.3 billion Wall Street is still hoping to see.  

Although management insists it is still on track to deliver $500 million or more in positive free cash flow this year, and although that works out to a tempting 12 times enterprise value-to-free cash flow valuation on the stock, the absence of growth means this stock is not quite as great a bargain as meets the eye.

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.

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