Scenarios That Can Impact Lexmark’s Stock

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Trefis
LXK: Lexmark International logo
LXK
Lexmark International

Lexmark International (NYSE:LXK) derives 85% of its revenues and 82% of its value from printer and supplies sales. Over the past few years, it has been systematically disinvesting from non-profitable and highly commoditized inkjet business, and investing in high margin process management software services, laser printer hardware and Managed Print Services (MPS).  While this shift has enabled the company to buck the decline in the printer hardware industry, we explore scenarios that can affect Lexmark’s valuation in the coming years.

See our complete analysis on Lexmark

Impact of Managed Printer Services  On Printer Sales To Boost Lexmark’s Valuation By 35%

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 1.16% in 2014. [1] However, to some extent, resilience in laser hardware sales has offset the decline in total sales. While laser printer sales increased marginally from 40.38 million in 2013 to 40.50 million in 2014, inkjet printer sales declined by 2% from 67.66 million in 2013 to 66.28 million. Lexmark has been 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. 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]

As a result, MFP’s share in printer sales has gone up from 73% in 2013 to 74% in 2014. Furthermore, laser MFPs contributed over 51% of the total laser shipments in the quarter. IDC ranks Lexmark a leader in the smart multifunction peripheral (MFP) market. [3] 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. We believe that this will enable the company to increase its market share in the printer industry and increase its profit margins. Currently, according to our calculations, Lexmark’s share in laser printer market stands at 4.5% with an EBITDA margin of 24.8%. Going ahead, we expect market share to stabilize at 4.5% and margins to decline to 25% due to competition from bigger players such as HP and Canon. However,  If Lexmark’s share in the laser market were to increase to 5.0% and margins were to increase to 28% by the end of our forecast period, our stock price estimate would increase by 35%.

Electronic Content Management And Business Process Management Growth Can Boost Valuation by 23%

The Perceptive software division is the second biggest business unit and makes up 8.7% of Lexmark’s estimated value. Lexmark plans to become an end-to-end solution provider, and Perceptive Software is becoming an increasingly important division for Lexmark. Perceptive experienced annual growth of 31% in 2014 and reported $313 million in revenues for FY14. Lexmark has guided 15% growth in Perceptive’s revenue for 2015. The electronic content management (ECM) and business process management (BPM) software markets that Lexmark participates in are projected to grow in aggregate approximately 11% annually over the next several years. The company has been increasing its portfolio in these spheres through acquisitions and organic growth. It has also increased its reach to clinical management and medical imaging. The healthcare content and process management market alone generated about $80 billion in 2014, according to Lexmark. [4] We expect the seamless integration of Perceptive’s array of solutions with MPS to bolster revenue for the company.

Currently, we expect Preceptive’s revenues to grow from $313 million in 2014 to over $500 million by 2021 at a profit margin of 13.5% (we have not included the effect of Kofax acquisition that should double Perceptive revenue to over $750 million).  However, if revenue were to grow to $1.5 billion (due to organic and inorganic growth) and margins to 17.5% (from the current 14.5%  forecast), primarily due to the opportunity that exists in ECM and BPM industries, Trefis’s Lexmark stock price estimate would increase by 23%.

Bear Case: Market Share in Laser Printer Declines and Margins Across Laser and Perceptive Falls

In the worst possible scenario for the company, the laser printer market share declines to 3.9% by 2021 with margins being static at 2014 levels. Additionally, in this scenario, the Perceptive Software division’s revenues grow slowly to $1 billion by 2021, and acquisitions impact EBITDA margins, which decline to 10.5%. Under such circumstances, our stock price estimate would decline by 25%.

See our complete analysis for Lexmark’s scenario

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Notes:
  1. Worldwide Hardcopy Peripherals Market Declines in the Fourth Quarter of 2014, February 15 2015, www.idc.com []
  2. 10-k []
  3. IDC Marketplace: U.S. Smart Multifunction Peripheral 2013 vendor assessment, www.idc.com []
  4. (10-k []