Keep Your Money Away From 2D Printing
Phillip is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In a 2D-printing market that is so competitive, even the giants are failing to keep up revenues. That competition makes operations difficult in an industry that demands massive resources to ensure product lines are current.
The following are the three largest 2D-printing companies, and while I wouldn't recommend buying shares of any of them, not all should be completely ruled out.
Lexmark International (NYSE: LXK) specializes in developing, manufacturing and supplying imaging, as well as providing printing, print services, device management, documenting workflow, and business content management solutions and business process.
Shareholders would be doing themselves a favor by staying away from this company. The firm is experiencing years of painful sales that are likely to continue because of the company's soft command of other market segments. Irrational pricing of inkjet printers that began around the turn of the century, caused the firm's revenue to fall significantly to the point where Lexmark is exiting that market segment. Low-end printers have deteriorated to the point where they aren't profitable, and the devices don't consume enough ink to facilitate enough profits from ink sales. Lexmark's inability to diversify into growth sectors spells continued trouble for the firm.
The company's revenue continues to fall, dropping by 10% year-over-year in 2012. Net profit suffered an even worse plunge, falling over 200%. That looks to worsen this year and next, as revenue is expected to fall another 8% in 2013 and 6% next year. This business needs to turn things around fast, but rivals Hewlett-Packard (NYSE: HPQ) and Xerox (NYSE: XRX) look to have a slightly better handle on things.
HP is more diversified, but still lacks in key areas
HP is a well-diversified company that offers printing capabilities, enterprise servers, storage and networking, software, financial services, corporate investment and personal systems. In focusing on the printing and computer segment, which accounts for the lion's share (40%) of the company's operating income and about half of the revenue, the firm is a leader. While the printing segment will likely grow, due to Lexmark pulling out of the segment, I see the PC sales decreasing as people continue to choose tablets.
The balance sheet and estimates support that theory. The company experienced a loss last year, but it underwent about $2.2 billion in restructuring costs. With that large investment, the company is poised to stabilize its balance sheet. However, revenue also decreased by about 6%, and analysts expect a further 7.4% plunge this year and another 2.2% after that.
Xerox is also challenged by weakening sales
Xerox offers a slew of service, most of which focus on printers and printing material. I see the company as being the best of these three, but like the others it is facing revenue regression. However, the company is battling hard, and it may be able to turn things around by focusing on more than just the standard black-and-white printing technology. Color technology is an important market, and the firm is able to attain higher revenue per page by focusing in that area.
That attention would help return on equity, and ensure a competitive advantage for the firm. Currently, Xerox has an asset turnover of 73.3 times, which is in line with the industry. The company also meets the industry standard for profit margin, at 4.89%. But, for now, operating at par isn't enough to beat the Tiger Woods' of the tech firms.
Is this sector best avoided?
In short, yes. All three of these companies are suffering from an industry with extremely low costs for printers. In fact, in many cases, printers are less expensive than the ink used to fill them. These firms are faced with a further burden due to the fact that ink is much cheaper to purchase online. So as costs to keep products current rises with the amount of competition in the market, the revenue-generating potential of those expenses is falling fast.
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Phillip Woolgar has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!