Thursday, July 23, 2009

Xerox, UPS give us some hints (XRX, UPS)

AlphaNinja - With an over-abundance of predictions from market pundits, politicians and economists over the length and depth of this downturn, we can find better indications from companies on the front lines. UPS and Xerox results show that the business environment is still terrible, but the decline has slowed. Neither are in a position to call the bottom yet.

Xerox (XRX) shares are up 7% this morning after the company reported mixed results. Mixed in that earnings beat expectations, but guidance for next quarter is below what people were looking for.

-->> While revenues were down significantly, the company increased gross margin by 1%
-->> Inventory reductions increased cash flow from operations, despite reduced net income
-->> Guidance for q3 EPS of 11-12cents is below the expected 14cents.

Most important in terms of what this says about the economy is that this quarter did NOT show an acceleration to the downside -->> the sales decline for this 3month period was not worse than the six months combined that just ended. Maybe things are bottoming, maybe not, but Xerox is managing quite well in this environment.

Taking their guidance of $1.5billion for cash from operations and subtracting $200million for CAPEX, the company may earn $1.3billion in Free Cash Flow, which is a FCFY (Free Cash Flow Yield) of 20% -->> HUGE yield, but it's that rich because of the big debt load the company carries.


UPS reported this morning, and it isn't pretty. Both volume and pricing were down, dropping operating margin to 7% from 11.7%. The stock is up on the day however, as investors were not expecting much from this quarter. Interestingly, while ground volume was down 5.4% in the US, air volume was actually flat. International package revenue is only 1/3 the size of domestic, but it had a much better performance thanks to a focus on costs.

Details from the release:
-->> "revenue per piece" declined 10.5%, due to reductions in fuel surcharges, the effects of lighter-weight packages and the negative impact of currency

-->> Consolidated revenue was $10.8 billion compared to $13.0 billion for the prior-year quarter, while consolidated volume was 914 million packages, down 4.7%.

Most important is the outlook:

“The economic environment continues to be difficult. Declines in both our domestic and international businesses appear to be stabilizing but volumes will remain significantly below last year’s levels,” said Kurt Kuehn, UPS’s chief financial officer.

Although declines in economic indicators are less dramatic than earlier in the year, questions remain as to when business activity will begin to strengthen,” he continued. “The business environment in the third quarter should be similar to the second quarter. As a result, we are providing the same guidance as we did for the second quarter – earnings per share within a range of $0.45 to 0.55."

Unfortunately, that guidance is below the street expectation of 59cents. I'm impressed the stock is holding up so well this morning. People may be betting that the guidance is conservative, and that UPS will beat it handily if they cut costs.

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