BEWARE OF LEXMARK's PENSION TROUBLES

  • mse-big-banner-new-03-17-2016-416716a-tonernews-web-banner-mse-212
  • 161213_banner_futorag_902x177px
  • ink-direct-banner-902-x-177-v-1-2-big-banner-03-23-2017
  • 05 02 2016 429716a-cig-clearchoice-banner-902x177
  • 2toner1-2
  • 4toner4
  • clover-depot-intl-us-ca-email-signature-05-10-2017-902x1772
  • Print
  • banner-01-26-17b
  • futor_902x177v7-tonernew
  • cartridgewebsite-com-big-banner-02-09-07-2016
Share

BEWARE OF LEXMARK's PENSION TROUBLES

 user 2009-05-29 at 12:22:14 pm Views: 57
  • #22126
    http://seekingalpha.com/article/139039-beware-of-lexmark-s-pension-troubles
    Beware of Lexmark’s Pension Troubles
    Lexmark
    (LXK), a manufacturer and supplier of printers, has seen its revenue
    decrease for the last four years, as stronger competition has forced it
    to reduce prices and exit now unprofitable product lines. While a
    string of revenue reductions of this nature may send most investors to
    the exit, value investors recognize that the business may still have
    some value, and thus prefer to first compare a company’s price with its
    value before determining a course of action.

    Lexmark trades with
    a market cap of $1.3 billion, despite the fact that it has around $800
    million of cash on its balance sheet. A healthy dose of cost-cutting in
    the first quarter of 2009 resulted in operating income of $75 million
    off of a sales decline of 20%. With its strong cash position and its
    P/E of just 7.5 in this depressed earnings environment, Lexmark would
    appear to have value potential on the surface.

    But as we
    discussed earlier this year, companies with defined benefit pension
    plans will be negatively affected by the stock market’s drop. Prudent
    investors who read the notes to the financial statements will see that
    Lexmark is indeed suffering from this phenomenon: Pension plan assets
    fell last year from $714 million to $469 million, against an estimated
    pension obligation of $734 million. This represents a shortfall of $265
    million, a cash outflow which will eventually have to be borne by
    shareholders (barring a miraculous stock market recovery, which of
    course is never safe to assume).When Lexmark’s pension shortfall is
    combined with its debt obligation of $650 million, its value potential
    is no longer as certain. While it might still be a buy, investors who
    don’t consider all of this company’s obligations are likely to
    overvalue its intrinsic value.