Lexmark IS Worth $44.30 Per Share

-25.03%
Downside
40.49
Market
30.36
Trefis
LXK: Lexmark International logo
LXK
Lexmark International

We recently revised our price estimate for Lexmark International (NYSE:LXK) to $44.3, based on the expected improvement in demand for laser and multifunction peripheral (MFP) printers in 2014 and beyond, and the increase in revenues from its newer business lines, i.e., managed printer services and business process outsourcing. Lexmark is in the middle of transforming its business from a focus on low margin ink jet printer sales to emphasize high margin process management software services, laser printer hardware and Managed Print Services (MPS). In this article, we will review factors that justify our stock price estimate for Lexmark.

See our full analysis on Lexmark

Strength In MFP To Boost Hardware Sales

Relevant Articles
  1. Lexmark Earnings: Revenue Decline Across Printer Division Continues
  2. Lexmark Pre Earnings: Printer Revenue To Decline, Software Revenue To Report Growth
  3. Lexmark Earnings: Revenue Declines Less Than Expected As Merger And Delisting Seems Eminent
  4. Lexmark Earnings Preview: Decline In Revenue To Continue
  5. What Percentage of Lexmark’s Stock Price Can Be Attributed To Growth?
  6. Lexmark Earnings: Revenue Declines More Than Expected

According to IDC, the worldwide hardcopy peripherals market declined for the first time after three consecutive quarters of growth. [1] However, to some extent, resilience in laser hardware sales has offset the decline in total 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. [2]

According to our calculation, based on the data from IDC, MFPs contributed 72% to the total shipments in Q2 2014. [1] Furthermore, laser MFPs contributed nearly 51% of the total laser shipments in the quarter. IDC ranks Lexmark a leader in the smart multifunction peripheral (MFP) market. [3] Additionaly, Lexmark continues to dominate A3/A4 mid-speed market segments with a share of 16.8%. We expect the company to continue to leverage its leadership to capture a bigger chunk of the laser printer market, particularly in the A4 MFP category. Currently we project Lexmark’s share in laser market as a whole to decline to 2.6% by 2021. 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 MPS and Workflow Services

Lexmark is a leader in the Managed Printer Service (MPS). Clients are increasingly looking beyond simple managed services to workflow solution services that will improve efficiency. According to Lexmark, the addressable market for both electronic content management (ECM) and business process management (BPM) is fairly large and offers good growth rates. Lexmark estimates that worldwide spending for content and process management in 2013 exceeded $10 billion. It expects that the content and process management software will account for about 30% of its revenue by 2015. The content and process management is expected to grow at 10% per annum in the near foreseeable future. [4]

Lexmark’s Perceptive business has four primary functions:  capture, content, process and search. It has been able to supplement growth in these areas through acquisitions (with financial and strategic support from Lexmark). As a result, Perceptive Software has emerged as a leader in Gartner’s magic quadrant for enterprise content management (ECM) solutions. [5] Although it continues to rollout products (such as Perceptive Content 7 and Perceptive Evolution) to leverage the growth in the ECM vertical by providing support through cloud computing, this class of service is constantly evolving. Therefore, Lexmark still needs to augment its product portfolio through acquisition, especially in regions where it has limited reach. 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 numerous acquisitions (ReadSoft, PASCGEAR, Saperion, Brainware, ISYS, Nolij, Acuo and Twistage) that are 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 $580 million by the end of our forecast period in 2021. 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%.

At present we have a $44.30 Trefis price estimate for Lexmark, which is 5% above its current market price.

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Notes:
  1. Worldwide Hardcopy Peripherals Market Declines in the Second Quarter of 2014, August 22 2014, www.idc.com [] []
  2. 10-k []
  3. IDC Marketplace: U.S. Smart Multifunction Peripheral 2013 vendor assessment, www.idc.com []
  4. Lexmark 10K, www.sec.gov []
  5. Perceptive Software Positioned in Leaders Quadrant of Gartner’s Magic Quadrant for Enterprise Content Management, September 30 2014, www.lexmark.com []