We recently upgraded our price estimate for Lexmark International (NYSE:LXK) from $37 to $40, based on the expected improvement in demand for laser and multifunction peripheral (MFP) printers in 2014, and the increase in revenues from its newer business lines.
Lexmark is in the middle of transforming its business from low margin printer sales to high margin process management software services, laser printer hardware and Managed Print Services (MPS). In this article, we will review factors that justify our price revision for Lexmark.
Increased MPS Revenues to Boost Supplies Revenues
- How Have Lexmark’s Managed Printer Service (MPS) Revenues Grown In The Last Two Years?
- How Big Can Lexmark’s Perceptive Business Become By 2020?
- How Has Lexmark’s Laser Printer Price Declined In The Last Five Years?
- How Have Lexmark’s Software Division Revenues And EBITDA Grown Since The Acquisition Of Perceptive In 2010?
- By What Percentage Did Lexmark’s Revenues And EBITDA Decrease In The Last Five Years?
- What’s Lexmark’s Fundamental Value Based On Expected 2015 Results?
The worldwide hardcopy peripherals market witnessed growth in Q4 2013.  However, IDC notes that a gradual shift in hardcopy peripheral devices away from the desktop, and towards more shared and centralized machines will drive the growth in the hardware industry. Companies such as Lexmark that offer MPS (Managed Print Solutions), which includes procurement, maintenance and other aspects of printing, stand to gain from this trend.
As a result, Lexmark is strengthening its Managed Document Services (MDS) product offering. It is synergistically combining printing services with content management, electronic documentation, and business process management, so as to establish its MPS business vertical. Due to these efforts, MPS contracts for Lexmark increased in 2013, and this has offset the decline in non-MPS revenues of imaging and software solutions (ISS). Moreover, this is propelling the supplies revenues, as most of these contracts also contain a clause for supplying printer stationery and cartridges. We believe that MPS, integrated with Perceptive’s solutions, will deliver value to Lexmark’s growing client base. We expect MPS to become the biggest driver of revenue for ISS division, and help stabilize cartridges-per-laser-printer metric at 7.3x going forward. However, if this figure were to increase to 8.0x, 0ur stock price can potentially increase by 5%.
Strength In MFP To Boost Hardware Sales
The company is concentrating on the large work group segment that is typically attached directly to large workgroup networks in corporations. The large workgroup products include laser printers and MFP devices. Typical MFPs include high-performance internal network adapters, and are easily upgraded to include additional input and output capacity and finishing capabilities, as well as additional memory and storage. According to Lexmark, color and MFP devices represent a more significant portion of the laser market. Customers are purchasing connected smart MFPs, and document and process management software solutions and services to optimize their document-related processes and infrastructure, in order to improve productivity and cost. 
According to our calculation, based on the data from IDC, MFP contributed 19% to the total shipments in Q4 2013.  IDC ranks Lexmark a leader in the smart multifunction peripheral (MFP) market.  We expect the company to continue to leverage its leadership to capture a bigger chunk of the laser printer market, particularly in the MFP category. Currently we project Lexmark’s share in laser market as a whole to decline to 2.46% by 2020. However, if Lexmark’s market share were to stabilize at the current level, our stock price estimate can increase by 20%.
A Change In Paradigm To Workflow Services
Lexmark is a leader in the Managed Printer Service (MPS). However, this class of service is constantly evolving. Clients are increasingly looking beyond simple managed services to workflow solution services that will improve efficiency. Lexmark has stepped up to the mantle and, over the past year, has made strategic acquisitions in the field of workflow services for some specific industries and businesses. The company completed seven acquisitions (PASCGEAR, Saperion, Brainware, ISYS, Nolij, Acuo and Twistage) in 2013 that will be integrated into Perceptive Software, and will help drive the company’s revenues through workflow and business process management services. We expect the seamless integration of Perceptive’s array of solutions with MPS to bolster revenue for the company. Therefore, we expect Preceptive’s revenues to increase from $239 million in 2013 to over $460 million by the end of our forecast period in 2020. However, the revenues from this division can be significantly higher in the future due to organic and inorganic growth that can help the company to capture a bigger chunk of $12 billion ECM-BPM industry. If Preceptive’s revenues were to increase to $700 million, our stock price can potentially increase by 5%.
- IDC Finds Continued Growth in the Worldwide Hardcopy Peripherals Market in the Fourth Quarter of 2013, February 19 2014, www.idc.com [↩] [↩]
- 10-k [↩]
- IDC Marketplace: U.S. Smart Multifunction Peripheral 2013 vendor assessment, www.idc.com [↩]