Shares of Xerox (XRX) rallied in afternoon trading after analysts at Credit Suisse and JPMorgan upgraded the stock following the company's completed separation of Conduent (CDNT).
CREDIT SUISSE UPGRADE: Credit Suisse analyst Kulbinder Garcha upgraded Xerox to Outperform from Neutral after Xerox announced that it completed the spinoff of business process services provider Conduent. The analyst said that the rating change takes into account a more focused print business, potential upside to cost savings, strong management and a well laid out long-term strategy to offset end market decline. While Garcha is cautious about Xerox's overall printing spend, he believes that management is "realistic" and has a long-term vision of moving the business away from mature declining markets to growth segments, including graphics and managed print services. The analyst cut Xerox's price target to $8 from $10, but noted that he views valuation as attractive. Garcha also said that he sees the company's standalone earnings per share for fiscal 2017 and fiscal 2018 at 89c and 90c, respectively.
JPMORGAN UPGRADE: In addition, JPMorgan analyst Paul Coster upgraded Xerox to Overweight from Neutral and raised his price target on shares to $10.50 from $10 following the Conduent spinoff, which the analyst says marks the start of a "long" turnaround process. Coster said he sees several "constructive" developments from the move, including a major Document Technologies product overhaul, expansion of the distribution channel, a shift towards growth categories and ongoing execution of the $1.5B productivity program. The analyst added that such initiatives may slow, but not reverse, secular revenue decline over the next five years, but should buoy margins, restore the company to about $900M in annual cash flow by 2019 and support roughly 10% dividend growth.
WHAT'S NOTABLE: At its Investor Conference last month, Xerox outlined the business strategy on what it called the "New Xerox." At the time, the company said that, as a standalone entity, it expects to expand operating margins to be in the range of 12.5%-14.5% in the near term by delivering at least $1.5B cumulative gross productivity and cost savings by 2018 through its strategic transformation program. Xerox also said that it expects to increase contribution from strategic growth areas to 50% of total company revenue by 2020 and to outperform the market over the long term.
PRICE ACTION: In afternoon trading, Xerox surged 15.7% to $6.66 while Conduent was down 7.42% to $13.80.
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