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LEXMARK :IS IT FINALLY GAME OVER ?
Lexmark has missed the boat on many fronts; The office products industry has been consolidating rapidly due to oversupply of commodity products offered at incredibly low prices particularly in the low to medium segment. Lexmark does’t have deep financial pockets, secured customer access in new markets particularly in non-US and emerging economies, a credible footprint of managed print services capabilities and captive channels of distribution.
Lexmark, which is an ex-IBM spin-off, has held its strong hold in relatively smaller verticals such as pharmacies, hotels etc. shielding itself from price wars and competition from larger rivals. Many larger rivals had approached Lexmark in past as a buyout candidate but the management with unreasonably high premium expectations combined with over-self confidence about the competitive sustainability of their business vis-à-vis HP/Canon/EDS, Xerox/ACS and Ricoh/IKON, refused friendly merger proposals.
In our opinion, Lexmark stands no chance of ever getting back to its heydays in the early to mid 2000s. We would even go as far as questioning the viability of their financial model as an independent vendor.They simply don’t have deep financial pockets, secured customer access in new markets particularly in non-US and emerging economies, a credible footprint of managed print services capabilities and captive channels of distribution. Unfortunately, given their reputation for passing on opportunities for merger combinations in the past, they may not even have any prospects for a friendly take-over anymore.
Despite management’s claims that this is a “tactical and not a strategic issue”, we would not buy the stock at this time. Accordingly shares of Lexmark were falling 15.5%, to a recent $32.36 in midday trading, after the printer maker posted disappointing first quarter earnings.
Lexmark–as with other technology companies, including rival Xerox Corp. –had been benefiting from businesses spending on technology upgrades after delaying these purchases during the economic downturn. But the company attributed its disappointing quarterly results and outlook primarily to increasing restructuring costs. Lexmark projected second-quarter earnings of $1 to $1.10 a share, below analysts’ latest average estimate of $1.15. Lexmark reported earnings of $83.3 million, or $1.04 a share, down from $95.3 million, or $1.20 a share, a year earlier. Excluding restructuring- and acquisition-related charges, profit fell to $1.14 a share from $1.35. Revenue slipped 0.8% to $1.03 billion.
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