Price Competition Hits the (Lex)Mark
What had already been a tough year for Lexmark shareholders just got worse.
It looks as though aggressive price competition in the printing market continues
to take a nasty bite out of the printer company’s profits, and the stock got
hammered Tuesday.
For the second quarter, the company produced revenue growth of all of 3%.
While the company did see 9% growth in laserjet/inkjet supplies and double-digit
unit growth for both printer types, pricing wreaked havoc on the business.
Although Hewlett-Packard is the most often mentioned culprit for the price
war, this whole matter isn’t unlike fights with your siblings — it doesn’t
really matter who started it because if it goes on long enough, everyone
involved is going to get hurt. So, even if Hewlett-Packard is the catalyst,
other competitors such as Canon and Seiko Epson are being pulled along as
well.
All the same, it doesn’t look like Lexmark is going to just sit around and
hope that things get better. Along with announcing earnings and lower guidance,
the company indicated that it will be cutting 275 jobs over the next year or so.
Lexmark’s current margins wouldn’t suggest that this is really necessary just
yet, but if price competition is the new game, it behooves the company to get as
lean (and mean) as possible.
It’s hard to say how long this could go on, but Canon and Lexmark would
seem to have more to lose from a margin perspective at this point. Of course,
the name of the game now is decidedly simple — get as many of your printers
into the market as possible. Since the real money (or profits, anyway) is in the
cartridge supply business, absorbing short-term pain with cheaper printers can
pay off if it means market share growth that translates into higher cartridge
sales down the line. But when everybody else cuts their prices in response, that
plan doesn’t work out quite as well as the PowerPoint presentation would have
initially suggested.
I’m not sure this is the greatest time to jump into these shares, but I’m
going to start paying a lot more attention now. The company has nearly $9 a
share in cash on the balance sheet, a strong product line, and a history of good
internal returns. Should the stock go low enough, we could all be looking at an
interesting and high-quality turnaround play