Lexmark International (NYSE:LXK) won a five-year, $50 million contract from the United States Department of Agriculture (USDA) to provide Managed Printing Services (MPS) for managing printing needs of various departments under the USDA. Lexmark, which provided an unimpressive outlook for the fourth quarter, may raise its outlook as MPS gains favor with the industry incumbents to streamline printing solutions. The contract was awarded under a Blanket Purchase Agreement (BPA) by the USDA.  Lexmark competes in this space with Xerox (NYSE:XRX) and HP (NYSE:HPQ).
We currently have a $39.75 Trefis price estimate for Lexmark, which is above the current market estimate.
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Lexmark Shifting Focus To Value Added Services
The first step for Lexmark to arrest declining margins is to couple goods with services as a value-add to retain premium pricing. Managed Printing Services is garnering a lot of attention from industries to manage printing costs. MPS tends to make printing cheaper and more efficient as it is offered as a service. Under the MPS procurement, maintenance and other aspects are taken over by Lexmark.
The company has earned a similar contract from Anehuser-Busch to provide MPS for the brewer. The printing solutions market has been seeing declining margins and having MPS as a service as opposed to just selling the product can help Lexmark rein in lower margins. This is, however, a stop-gap solution and is only a matter of time before services start facing margin pressure. To be sustainable, Lexmark will have to find a niche where it can retain pricing power.Notes: