Are Tablets Bad News for Lexmark?

Lexmark International (NYSE:LXK) manufactures and sells laser printers and cartridges, primarily to business customers in North America and Europe. It competes with HP (NYSE:HPQ), Xerox (NYSE:XRX), Canon (NYSE:CAJ), and Kyocera (NYSE:KYO) in the printer business.

The recent rise in popularity of tablets, e-readers and other mobile devices has led to more and more people opting to go paperless and shift their content consumption to the digital stage. As Lexmark’s core business is the sale of printers and cartridges, this could spur downside to our $47.40 price estimate for Lexmark’s stock. Our price estimate currently stands about 30% ahead of market price.

Slowdown in Printer Sales

Over the years, increasing digital communication (e.g. emails, PDFs, and digital forms) has slowed printer demand. People opt to send forms and letters over email rather than printing and mailing a hard copy. Concurrently, greater availability of wireless broadband Internet, shared network printers, and mobile computing has made it easier for groups to share printers, putting additional downward pressure on demand for printers.

More recently, the surge in demand for tablets, e-readers and smartphones has provided a reliable means for users to access their documents anytime and anywhere, further reducing need for printers. With an increasing number of organizations looking to equip their employees with these devices going forward, printer sales could decline considerably.

We currently estimate that global laser printer sales will increase from around 46 million units in 2010 to 72 million by the end of our forecast period. But if the trends towards reduced printer need take hold, and printer unit sales increase at a slower rate to 60 million units, it would imply 5% downside to our $47.40 price estimate for Lexmark.

Fewer Cartridges per Printer

While the number of cartridges per laser printer has historically increased, lower paper consumption in the future could alter the trend. We currently forecast that the number of cartridges per laser printer will remain constant going forward, at around 7. However, a reduction in demand to 6 cartridges per laser printer over our forecast period would imply 5% downside to our $47.40 Trefis price estimate for Lexmark’s stock.

You can drag the trend lines in the interactive charts above to see how various scenarios for laser printer units sold and cartridges per laser printer affect Lexmark’s stock value.