Concerns About this Business Send Shares Sliding

Naomi is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A few days ago, shares of Lexmark International (NYSE: LXK), a known printer manufacturer with its shares currently trading at $23.18, slid by over 6%. This decline was as a result of the downgrade by Deutsche Bank analysts, with an $18 price target set on the stock. The major reason behind this is that the analysts from Deutsche Bank believe that the inkjet printers market is growing weaker by the day and the company is continually facing stiff competition from laser printer manufacturing companies. Their view is shared by Citigroup, which also gave the stock an $18 price target. However, it was slightly different with the views of analysts from Zacks, who set the stock’s price target at $22 and rated it neutral.

The sales of Inkjet supplies and hardware makes up 15% of the company’s revenue, which is expected to suffer a decline because with consumers opting more for laser printers (which are known for production of higher quality printouts), there is an estimated decrease of up to 40% YoY in the inkjet market, with little or no hope of increase. In the words of Deutsche Bank analysts,

We believe LXK generates ~15% of its 2012 revenue from inkjet hardware and supplies and we estimate ink comprises ~$2.50+/share in earnings in FY12. Over the next few years, we expect this earnings stream to trend towards zero, declining at a 35-40% Y/Y clip as the installed base shrinks following the exit of hardware production. This earnings exposure is substantial and it remains unclear how LXK will sustain EPS over the medium term. In the meantime, we expect competition in laser to heat up.

In August, Lexmark laid off no less than 1,700 employees when it closed its inkjet printer division. This left the company no option other than to come up with new laser printing solutions, which is happening at a time when the printer marketplace is already saturated. This is one of the major reasons why investors are worried about the fate of the company. However, the company’s Chairman and CEO, Paul Rooke, has given investors assurance that the fact that Lexmark’s inkjet printer division was closed does not mean that the company is moving away from the printing business.

The CEO goes further to say that,

Lexmark’s recent acquisitions have put the company in a better position it to meet the changing needs of its clientele. While we are not moving away from the printing business…we still have our core laser printing business, we are adding a number of software assets to our company to be able to help customers manage between this paper world that they still are swimming in, but also help them bridge to this digital world that they want to be in.

Over the past twelve months, Lexmark’s stock has suffered a decline of up to 27%, which is higher than the decline suffered by Canon (NYSE: CAJ), which is currently trading at $37.87, with a 52 week high of $48.48 and 52 week low of $29.81, and suffered a decline of 14.5%. Its other industry peer, Xerox (NYSE: XRX), experienced a decline of 10.6% and is currently trading at $6.98, with a 52 week high of $8.84 and a 52 week low of $6.10 and an EPS of $0.89.

Although Lexmark has “rolled out a full line of new laser printers and multi-function products,” with the decrease in consumers’ needs of traditional printing solutions in order to cut down on print cartridges and paper expenses, and the recent downgrade by Deutsche Bank and Citigroup analysts, we are watching and waiting for what happens next.

Chizy has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus