BEWARE OF LEXMARK's PENSION TROUBLES

[Anonymous]

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.

[Author]

May 29, 2009 at 12:22 PM