Xerox Slips To Sell On Litigation Woes - Analyst Blog

On Jun 11, Zacks Investment Research downgraded information technology services provider Xerox Corporation XRX to a Zacks Rank #4 (Sell) from a Zacks Rank #3 (Hold), primarily due to negative investor perception stemming from dwindling healthcare and Medicaid contracts.

The downgrade notwithstanding, the company still has the potential to drive the stock up. The stock is currently trading at a forward P/E of 11.7x with long-term earnings growth expectation of 7.3%.

Why the Downgrade?

The Texas Attorney General's office recently filed a lawsuit against Xerox, looking to recover hundreds of millions of dollars that the company allegedly squandered away for unnecessary Medicaid claims. The state's Medicaid agency, the Health and Human Services Commission (HHSC), also decided to prematurely abort Xerox's five-year claims administration contract reportedly worth about $759 million.

The lawsuit charges Xerox of incompetence in performing medical reviews as required by the contract, thus jeopardizing taxpayers' money. Xerox has allegedly allowed corrupt dentists to provide expensive treatment for thousands of poor children who did not meet the government's stringent criteria for costly dental work.

Close on the heels of this allegation, the state board overseeing the troubled Nevada Health link unanimously voted in favor of severing ties with its health insurance exchange operator, Xerox, citing underperformance as the primary reason. Xerox allegedly fell woefully short of expectations, as the system was weighed down by malfunctions and delays in the website.

The negative publicity seems to have dented investor confidence and earnings estimates have taken a beating both for the current quarter as well as the full year. The Zacks Consensus Estimate has moved south in the last couple of months by 7.1% and 2.7% respectively for the second quarter and 2014.

Other Stocks to Consider

Stocks in the industry that are worth considering include The Hackett Group, Inc. HCKT, Canon Inc. CAJ and Pitney Bowes Inc. PBI, each carrying a Zacks Rank #2 (Buy).

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