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Investment Overview for Lexmark (NYSE:LXK)
Below are key drivers of Lexmark's value that present opportunities for upside or downside to the current Trefis price estimate for Lexmark:
- Lexmark Laser Printer Market Share: Multifunction (MFP) laser printers are currently the most popular printers because of multiple functions combined into a single machine. Though MFP's are relatively expensive, it is more efficient when compared to having separate printers, scanners, photocopying and fax machines. It is also cheaper to own and operate compared to owning several devices. If the market adopts these machines at a faster rate and growth increases from our estimated 1.3 million units to 1.8 million units by the end of our forecast period, we can expect an upside of upto 5% of our current Trefis Price Estimate. This is likely to occur if the Managed Printing Services (MPS) does not take off in the near term.
However, if the total laser market size stagnates at the current level and remains at 44 million units till the end of our forecast period, we can estimate a downside of over 10% from our current Trefis Price Estimate. This is likely to happen if IT spending remains at current levels due to the Europe crisis and a rapid shift to MPS occurs. This will lead to short term fall in revenues as current printer inventory must be sold at reduced prices.
Lexmark makes money by selling printers and ink cartridges to consumers and businesses worldwide. Lexmark offers both laser and inkjet printers, as well as multi-function (MFP) laser and all-in-one (AIO) inkjet printers. The AIOs and MFPs have additional capabilities, such as the ability to scan, copy and fax. Products are sold directly by the company and through distributors and retailers, such as Best Buy, Staples, Office Depot and Walmart.
Leader in Managed Printing Services (MPS)
Lexmark has been recognized as the leader in Managed Printing Services (MPS) by industry analysts Gartner, IDC and UK based Quocirca. MPS is a high margin business and is countering the low margins of the highly commoditized hardware market. We estimate that the margin for hardware is ~17% and will remain the same till the end of our forecast period. The Quocirca report estimates that security and cost efficiency are the biggest drivers for enterprises to shift to MPS followed closely by reduction in carbon foot print and operational efficiency.
Number of Laser Printers & Cartridges Sold
Although we believe that Lexmark had about 3.0% market share in the 80 million unit inkjet printer market in 2011 (implying ~2 million inkjets sold) compared to only 3.8% market share in the 44 million unit laser printer market (implying ~1.7 million laser printers sold), the company has announced that it will exit the inkjet market and we expect the inkjet units sold to reduce to nearly zero by by 2016.
Shift to Multifunction Printers (MFP)
Multifunction printers (MFP) have gained traction in recent times. Laser MFP units sold has increased from 0.5 million units in 2004 to 1.1 million units in 2012. We estimate MFP to replace all stand alone printers going forward. This is likely to provide short term pricing power to Lexmark as the average price of an MFP is currently at $636 as compared to non MFP laser printers priced at $378.
Shift from Inkjet to Laser
Declining laser printer prices have made laser printers more affordable for homes and small businesses. We expect this trend to continue, leading to the eventual replacement of inkjet printers with laser printers.
Overall Slowing of Printer Sales
Increasing digital communication (emails, PDFs, and other digital forms) has slowed printer demand, as people have increasingly opted to send forms and letters directly rather than printed hard copies. Improved networking and wireless broadband Internet has made it easy to implement shared network printers which puts additional downward pressure on demand for printers while simultaneously increasing demand for supplies.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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