On Friday, Xerox (NYSE:XRX) shareholders were greeted by some very pleasant earnings news. The document company posted impressive earnings of $224 million versus a loss of $65 million last year. After backing out special items, earnings came in at $0.17 per share, two pennies more than analysts expected. This was a great improvement compared to the $0.10 per-share loss for the same quarter the year before. However, one can only imagine shareholders' dismay as they watched the stock slide 8.5% to close at $13.18. Talk about a major paper jam.
Like any annoying copier or printer malfunction, investors had to be asking themselves, "What gives?" Although Xerox posted some impressive earnings figures, the market was apparently not buying it. Concerns over margins and foreign competition seem to be the major culprits. Xerox's gross profit margin slipped roughly 2% to 39.8%. Slipping margins will certainly trigger flags in this cutthroat industry, where competitors like Ricoh, Canon (NYSE:CAJ), and Hewlett-Packard (NYSE:HPQ) look to devour market share.
The company also released equipment sales figures of a 9% increase for the first quarter. However, when you factor in the weak dollar, suddenly that number shrinks to 4%. Looking at overall sales for 2004 thus far, Xerox posts a 2% increase over the 2003 fourth quarter, but factor in the 5% benefit from currency and suddenly the figure gets ugly.
Sales figures propped up by a weak dollar are not a new occurrence for Xerox, as Rich Smith noted when he critiqued Xerox's Fuzzy Math. Investors should take note of bloating sales figures due to currency benefits. Without looking a little deeper, it is easy to think that a company's results are stronger and more dependable than they truly are.
While Xerox sales figures were a bit of a downer, the company showed strong free cash flow of 57% to $195 million for the quarter, and it decreased debt by $550 million. These are good signs for this once-proud stalwart.
However, for Xerox to really copy its past success, it will need to continue paying down its $10.6 billion in debt and maintain margins that allow it to stay with the competition.
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Fool contributor Jason Matthews does not own shares of any of the companies mentioned here.
