Lexmark Fair Value $32: Results Disappoint And Q2 Outlook Lowered

Lexmark International (NYSE:LXK) posted its Q1 earnings for 2012 with revenue declining slightly y-o-y to $993 million. This was in line with the outlook provided. Lexmark has also lowered its outlook for Q2 2012 citing its shift of focus from retail consumers to managed print services. ^[1] It also stated that it will change its business mix by pushing Perceptive Software, a company that it acquired in 2010. The company competes with Xerox Corp and Hewlett-Packard (NYSE:HPQ) in the printing solutions space.

See our full analysis on Lexmark

Outlook for 2012

Lexmark is following the path of market leaders Xerox and Hewlett-Packard by phasing out printers targeted at the consumer market and focusing on providing managed print services. Perceptive Software, a standalone business unit of Lexmark focused on enterprise content management (ECM) business process management (BPM), enables capturing physical data such as faxes, notes, bills and other physical documents and bringing them into the workflow as soft copies. These services help its customers reduce costs as well as streamline processes.

A focus on higher margin services has led to gross profit margins rising slightly to 38.4% compared to 37.6% same period last year. We expect this to rise further as Lexmark adds software and services to its business mix. This shift in focus, however, has led to a loss of revenues and net earnings dropped 27% to $61 million compared to $83 million same period prior year. The company has also issued a lower outlook for Q2, stating that it expects revenue to decline 7%-9% y-o-y.

Focus On Perceptive Software, New Innovative Smart Devices

Perceptive Software is likely to become a key player in the near future. Lexmark has completed three acquisitions (Brainware, ISYS and Nolij) and these will be integrated into Perceptive Software, which will help drive the company’s software business.

Lexmark is also introducing smart devices that bundles features such as scanning, fax, invoice processing, etc., into a printer. It has also introduced devices in the mid-range color segment which provides a touch screen interface and is priced under $1,000. It sees potential in the mid-range consumer segment in the short term.

We currently have a $32 Trefis price estimate for Lexmark, which is about 7% over its current market price.

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1. Lexmark SEC Filings, www.sec.gov, April 24, 2012 [↩]