All-In-One Printer Demand Will Help Lexmark’s Stock

Lexmark (NYSE:LXK), a key player along with HP (NYSE:HPQ) in the printer market, saw strong demand for its high-end printers in both the laser and inkjet categories during the past quarter.  This positive development comes after four quarters of weak performance experienced during late 2008 through Q3 2009. Improvement in Lexmark’s inkjet business can be attributed to strong demand for the company’s new SmartSolutions All-in-One (AIO) line of printers.  We have updated the Trefis price estimate for Lexmark’s stock from $32.74 to $33.74, in part to reflect higher pricing for AIO Inkjets.

Although Lexmark’s inkjet printer and cartridges business constitutes only about 4% of the company’s value, the injket business is once again gaining traction as a result of demand for AIO-type printers.

Below we discuss Lexmark’s change of focus from low-end to high-end AIO printers, why we expect Lexmark AIO inkjets pricing to sustain over our forecast period, and why we expect Lexmark to phase out low-end inkjets in the future.

All-in-One printers: Shifting focus from low-end to high-end inkjets

Lexmark makes money by selling inkjet printers, laser printers and printer cartridges.  Its inkjet printers have traditionally been targeted for the consumer market; however, with the introduction of SmartSolutions, a high-end line of AIO offerings in September 2009, Lexmark is targeting small and medium businesses.

AIO inkjet printers are far less expensive compared to the high-end laser printers that many businesses have traditionally preferred.  AIO printers are increasingly more capable making them more attractive to both consumer and business customers.  We expect that AIO printers will account for nearly all of the inkjets shipped by Lexmark by the end of our forecast period.

All-in-One printer pricing to sustain at $116 levels

Unlike the declining prices for most inkjets, AIO inkjet printer prices have increased from $74 in 2005 to $128 in 2009.  Going forward, we expect All-in-One inkjet printer pricing to remain at around $116 over the Trefis forecast period.  We expect Lexmark to counter price cuts from competitors by providing innovative additions to its product line.

We believe that Lexmark’s shift to high-end All-in-One inkjet printers can slow the decline of its overall inkjet business which has suffered from demand shifts toward laser printers

You can modify the forecast above to see how Lexmark’s stock is impacted by AIO inkjet printer pricing.

Lexmark is likely to phase out low-end Inkjets

Lexmark’s inkjet business has seen a continuous decline in the past owing to stiff competition from HP and increasing demand for laser printers. Lexmark’s inkjet pricing saw a nearly 50% dip from $60 in 2005 to $32 in 2009. This has made the low-end inkjet business quite unattractive for Lexmark, as its revenues and margins were taking a hit.

We expect Lexmark’s inkjet printer pricing to decline to $26 by the end of Trefis forecast period. We expect Lexmark to phase out low-end inkjets and concentrate on high-end inkjets like All-in-One printers in the future.

For additional analysis and forecasts, here is our complete model for Lexmark’s stock.