DECLINE IN LASER CARTRIDGE PRICING IMPACT LEXMARK's STOCK

[Anonymous]

http://www.trefis.com/articles/13535/declining-laser-cartridge-prices-impact-lexmarks-stock/2010-03-18
DECLINE IN LASER
CARTRIDGE PRICING IMPACT LEXMARK’s STOCK
March  2010  Lexmark manufactures and sells laser cartridges
primarily to business customers in North America and Europe.  Laser
cartridge sales are an important source of growth for printer makers
such as Lexmark, HP, Samsung, Canon and Epson.  We expect Lexmark’s
laser cartridge pricing to continue to decline over time due to greater
competition.

Importance of Laser Cartridge Business

We
estimate that Lexmark’s laser business (printers and cartridges)
constitutes 78% of the $34 Trefis price estimate for Lexmark’s stock. 
The cartridge business in particular is important for two main reasons:

1. 
Printer Hardware Itself is Low Margin or Loss Making

Many
printer makers sell printer hardware at a small profit or sometimes even
at loss in order to increase their penetration among business
customers.

2.  Laser Cartridges Have High Profit Margins

Low
margin printer hardware helps to lock-in cartridge customers.  This
makes it easier for printer makers to make higher profits by selling
more expensive proprietary printer cartridges to customers.

Laser Cartridge Pricing Expected to Decline
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http://www.trefis.com/company?hm=LXK.trefis&hk=56807559c3b53c67f1d6249b70a9959615e5b286#

Printer buyers are increasingly aware of the long-term costs
associated with printer cartridges and adjust their printer purchase
decisions accordingly.  This is leading to a price war among cartridge
manufacturers in order to drive the unit sales.  As a result, Lexmark’s
average laser cartridge price has fallen approximately 18% from $235 in
2005 to $192 in 2009.
Going forward we expect Lexmark’s laser
cartridges prices to decline rapidly and reach $147 by the end of Trefis
forecast period.  This decline is attributable to the following
factors:

1. Lexmark will try to pricing aggressively to
compete with market leaders, such as HP and Canon, given the large
cushion of margins in the cartridge business

2. Cheaper
cartridges from third-party manufacturers will partly contribute to the
decline in prices

3. Decline in manufacturing costs every year
will facilitate competitive price reductions

You can modify
our forecast above to see how Lexmark’s stock could be impacted if the
decline in cartridge prices were greater than we forecast.

[Author]

March 22, 2010 at 11:16 AM