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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: Laser printer market has fared well over the past few years buoyed by growth in multifunction printers (MFP). 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. Lexmark has been focusing on launching new MFP. As a result, its market share in the laser market has improved due to growth in MFP sales. If the market adopts these machines at a faster rate, Lexmark's share in the laser market can improve. If its share were to increase to 5% of global laser market, then we can expect an upside of upto 10% of our current Trefis Price Estimate.
However, if Managed printer service (MPS) gains traction, the total laser market size declines by 10%, and Lexmark's market share declines to 4%, we estimate a downside of over 10% from our current Trefis Price Estimate.
- Perceptive Software Revenue and EBITDA margin: Perceptive revenue has increased at a CAGR of over 59% since its acquisition in 2010. This business is a high margin and is addressing $10 billion ECM and BMP market. We expect Lexmark to post $940 million at 16.5% margin by the end of our forecast period. If revenues were to grow to $1.3 million at a 20% margin, our price estimate can increase by over 15%. On the other hand, Lexmark's Perceptive business were to grow at a slower rate to $1.1 million at 10% margin, our stock price estimate can be lower by 10%.
Lexmark makes money by selling printers and cartridges to consumers and businesses worldwide. Lexmark offers laser printers, and in the recent years has exited the inkjet printers market. Over the past few year, it has established itself as multi-function (MFP) laser printer leader. These 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 and IDC. MPS is a high margin business and is countering the low margins of the highly commoditized hardware market. We estimate that the margin for the hardware is ~27%. We expect it to decline in the coming years due to overall decline in average sales price (ASP) of MFP and laser printers. 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 footprint and operational efficiency.
Enterprise Content Management (ECM), Business Process Management (BPM) software products through Perceptive
Lexmark acquired Perceptive software in 2010. Since then the company has been building its portfolio for the $12 billion ECM and BPM industry through organic and inorganic route. As a result, Lexmark has witnessed CAGR of close to 59% in the past four years. We expect this trend to continue in the coming years that should add significant value to Lexmark's business.
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 enabled easy implementation of shared network printers which put additional downward pressure on demand for printers while simultaneously increasing demand for supplies.
Growth in ECM and BMP business
Lexmark has witnessed good growth in ECM and BMP business. It expects this business to grow at a CAGR of 15% over the next few years due to higher adoption of these services by
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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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