*NEWS*LEXMARK CASHING IN ON TONER SALES

Date: Tuesday April 20, 2004 11:17:00 am

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<DIV>Lexmark first-quarter profit rises 28 percent</DIV>
<DIV> NEW YORK, APRIL 19-Lexmark International Inc., the No. 2 U.S. printer maker, on Monday said its first-quarter profit rose 28 percent and beat expectations, powered by strength in sales of replacement ink and toner. </DIV>
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Despite the gains and a rosy forecast for second-quarter profit and revenue growth, analysts said the tone on the conference call of Lexmark’s chief executive was more cautious about competition and pricing levels than in recent quarters. 
”They expect it to be a competitive environment, especially in the inkjets, and they tend to be a conservative company,” FTN Midwest Research analyst William Fearnley said. “The printer business is still good, but more people are fighting after the profit pool in ink.” 
”It was a solid quarter… but it was a fairly cautious call for a company that beat expectations,” added Cross Research analyst Shannon Cross, who said the results were boosted by sales to Dell Inc.(NasdaqNM:<A class=text2 href= “http://finance.yahoo.com/q?s=dell”> color=#0000ff DELL</A> – <A class=text2 href= “http://finance.yahoo.com/q/h?s=dell”> color=#0000ffNews</A>), the No. 1 computer maker which sells Dell-branded printers manufactured by Lexmark. 
Shares of Lexington, Kentucky-based Lexmark, which ranks behind Hewlett-Packard Co. (NYSE:<A class=text2 href= “http://finance.yahoo.com/q?s=hpq”> color=#0000ff HPQ</A> – <A class=text2 href= “http://finance.yahoo.com/q/h?s=hpq”> color=#0000ffNews</A>) in the printer market, ended higher on the New York Stock Exchange (<A class=text2 href= “http://us.rd.yahoo.com/finance/news/keywords/news/SIG=12g8261pe/*http://search.news.yahoo.com/search/news?p=%22New%20York%20Stock%20Exchange%22”> color=#0000ff News</A> – <A class=text2 href= “http://us.rd.yahoo.com/finance/news/keywords/websites/SIG=12656uu0a/*http://search.yahoo.com/search?p=%22New%20York%20Stock%20Exchange%22″> color=#0000ffWebsites</A>) after falling in early trading. 
Lexmark said its net income rose to $121.0 million, or 91 cents a share, from $94.6 million, or 73 cents, a year earlier. Revenue rose to $1.26 billion from $1.11 billion. 
Analysts were expecting a profit of 88 cents a share, according to Reuters Research, a unit of Reuters Group Plc. 
Lexmark Chief Executive Paul Curlander said sales of supplies grew by 14 percent, benefiting from a 17 percent rise in printers. But he said he remains cautious due to the potential for aggressive price competition, and noted that demand from consumers outstripped demand from businesses. 
”Perhaps printers are a little further down the list of priorities than several other (technology) categories,” he told analysts on a conference call, although he noted that buyers in the government and retail sectors were still active. 
Curlander said price competition in the printer market is aggressive but noted that Lexmark is working to push down its costs to maintain profit margins. 
”We saw prices down 15 percent to 20 percent on lasers and 20 percent to 25 percent on inkjets,” he told Reuters in an interview. “Most companies if you dropped prices 20 percent they would go negative in profitability. The ideal is to at least match the price declines with cost declines.” 
Lexmark said its gross profit margin rose, although it was somewhat offset by higher sales of low-margin printers. Manufacturers often sell printers at no profit or a loss in hopes of reaping recurring sales of more profitable supplies of ink and toner. 
Lexmark forecast a second-quarter profit of 88 cents to 98 cents a share. up from 77 cents last year, on a revenue growth rate in the high-single to low-double digits. Analysts are expecting a profit in the second quarter of 90 cents a share, with a range of 85 cents to 95 cents, according to Reuters Research. 
Shares of Lexmark ended up $2.31 cents to $96.16, not far from its 52-week high of $97.00, hit last week. The stock had not reached that level since May 2000. HP shares were off 1.3 percent, or 28 cents, to $21.72. 
Lexmark Inks More Profits
I’ve been a computer geek for longer than I care to admit, and I remember when Lexmark International <a target=”_blank” href= “http://quote.fool.com/uberdata.asp?symbols=LXK onclick=openWindow http://quote.fool.com/uberdata.asp?symbols=LXK , quotebox , 640, 460; return false;”> color=#0000ffNYSE: LXK</A> was a wee sapling, growing amid oaks like Epson and industry leader Hewlett-Packard <a target=”_blank” href= “http://quote.fool.com/uberdata.asp?symbols=HPQ onclick=openWindow http://quote.fool.com/uberdata.asp?symbols=HPQ , quotebox , 640, 460; return false;”> color=#0000ffNYSE: HPQ</A>.
This morning’s <A class=text2 href= “http://quotes.fool.com/custom/fool/html-news.asp?guid=%7B868DF5E8-4098-48F6-8080-313BA626601E%7D&currticker=lxk&symbols=lxk&nx=&bx=”> color=#0000ffearnings release</A> shows that the smaller firm continues to shoot upward, building on its strong roots in the printing business. Today’s results are much cheerier than the <A class=text2 href= “http://www.fool.com/News/mft/2004/mft04012612.htm”> color=#0000ffsomber predictions</A> that management made back in January.
For the first quarter, revenues jumped 13% to $1.3 billion and diluted earnings per share nearly doubled that increase, climbing 25% to $0.91. The earnings growth was driven by a 0.6% increase in gross margins and a decrease in operating expenses as a percentage of revenue.
In short, the firm still looks like a business with a license to print money, and it looks well-positioned to capitalize on <A class=text2 href= “http://www.fool.com/News/mft/2004/mft04041621.htm”> color=#0000ffincreased demand</A> for computers. While other firms such as <A class=text2 href= “http://investorplace.com/order/?pc=2PA393&r=d”>Motley Fool Stock Advisor</A> recommendation Dell <a target=”_blank” href= “http://quote.fool.com/uberdata.asp?symbols=DELL onclick=openWindow http://quote.fool.com/uberdata.asp?symbols=DELL , quotebox , 640, 460; return false;”> color=#0000ffNasdaq: DELL</A> and Gateway <a target=”_blank” href= “http://quote.fool.com/uberdata.asp?symbols=GTW onclick=openWindow http://quote.fool.com/uberdata.asp?symbols=GTW , quotebox , 640, 460; return false;”> color=#0000ffNYSE: GTW</A> are broadening their product portfolios to include devices well outside their traditional areas of expertise, Lexmark has resisted the <A class=text2 href= “http://www.fool.com/news/commentary/2004/commentary040407bm.htm”> color=#0000ffsiren song</A> of consumer electronics diversification to stay on target with printers, multi-function printers, and supplies — where the real money is made.
Valuing the firm is the tough task. At around $93 per share, the stock isn’t far off its recent 52-week high, but there is little reason to be spooked by the P/E ratio of 28, even though analysts predict only 12% earnings growth for the year. Lexmark has a history of good-looking free cash flow. Last year, $654 million poured in, so today, the enterprise value is 17.5 times that trailing free cash flow. That’s a discount to the rest of the market, and suggests that the company has more climbing to do before it tops out.</DIV>
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April 20, 2004 at 11:17 AM

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