*NEWS*IS LEXMARK OUT OF INK ?
*NEWS*IS LEXMARK OUT OF INK ?
2006-07-31 at 2:30:00 pm #16108
Is Lexmark Out of Ink?
revitalized Hewlett-Packard appears to be successfully taking on a
number of rivals, such as Dell , which is having to decrease the
selling price of its computers to effectively compete with HP. Same
goes for Lexmark , where HP has undercut what has traditionally been
Lexmark’s turf — affordably priced printers,Lexmark has moved to
increase its laser jet printer product offerings, playing on HP’s home
turf as it owns approximately 40% of the laser market. But shifting
product mix from inkjet to laser printers takes time. Meanwhile, other
firms such as Canon and Epson (which, along with Lexmark and HP, hold
about 75% market share) are eating away at Lexmark’s more entry-level
and aggressively priced product mix.
The final competitive front
consists of the battle for selling highly profitable printer ink
cartridges and related supplies, or the notorious razor and razor-blade
model popularized by Gillette, now part of Proctor & Gamble.
Indeed, at times, Lexmark and others in the industry have sold their
printers for a loss to ensure consumers purchase their own cartridges
that reap huge profit margins. But lately, outside firms such as
drugstore chain Walgreen have begun to offer much cheaper ways to
refill existing cartridges.Sounds like a tough industry, but it still
has an estimated $85 billion market size and is expected to grow as
consumers increasingly work from home or print their own digital
photos. So, what is Lexmark doing to fend off competition and
capitalize on these trends? For starters, it’s focusing on reducing
costs and the overall cost structure of its operations. It has also
increased R&D development and identified color printing as an area
to focus on, as well as multifunctional, or all-in-one, devices capable
of printing, copying, and faxing documents. Plus, there’s the move to
laser jets.Fortunately, Lexmark has a conservative management team with
a solid reputation for generating high levels of cash flow.
Second-quarter results released Tuesday demonstrated that things are
indeed tough currently as restructuring expenses are taking a big bite
out of operating earnings, though on a per-share basis, they actually
increased as management is buying back quite a bit of stock. Overall
sales fell about 4%, but cash flow generation appeared to be decent.The
stock fell Tuesday as third-quarter guidance was below what analysts
were originally projecting. The shares have recovered a bit since then
but are still way below the highs of $90 reached earlier in 2005 before
industry conditions became grim.I’m currently relying on management’s
track record of dealing with industry turmoil in the past, but if
things don’t turn around relatively soon, I may have to take Legendary
Investor John Neff’s advice and “fess up, get out, and move on” to a
better investment idea. I’m not even sure he would find Lexmark’s P/E
ratio low enough to warrant investment, but there is a chance Lexmark
could eventually prevail from current weakness to profitably grow