Why Is Lexmark Worth $42.48?

Lexmark International (NYSE:LXK) derives most of its revenues from the sales of printer and supplies, which makes up nearly 86% of its value. However, the company is aggressively building its software business to diversify from the flagging printer industry, where competition from bigger players such as HP and Canon limits the growth for smaller companies.

Recent trends in the worldwide hardcopy peripherals market indicate that the demand for printer hardware remains tepid. Lexmark has also exited the low margin inkjet printer hardware market, and vestigial inkjet supplies revenues will end by 2016. In a bid to transform its business, Lexmark is focusing on high margin process management software services, laser printer hardware and Managed Print Services (MPS).  The company continues to acquire companies that will be integrated with Perceptive Software to bolster its business process management offering. In this article, we will review factors that justify our $42.48 valuation of Lexmark.

See our full analysis on Lexmark

Focus On High End Inkjet And MPS To Drive Growth

According to IDC, the worldwide hardcopy peripherals market shipment declined by 2.5% in Q1 2015. ^[1] The past trend indicates that demand for inkjet and Laser printer remains tepid. The total single function printer market declined -8.0% year over year in the first quarter, and total multifunction peripheral (MFP) shipments decreased by -0.3%. However, MFPs showed strong performance in all color laser speed ranges, especially in 31-44 ppm, growing 19.9% year over year.

In the recent quarters, Lexmark’s unit sales of printer hardware and supplies have declined in line with the decline in printer hardware industry. However, Lexmark has been restructuring its business in light of the emerging trends in the printer hardware industry. Lexmark exited from its low margin inkjet printer business and increased its focus on the higher margin laser printers, especially MFP. Furthermore, it is extensively focusing on the A4 (paper format) printer segment that forms 76% of total printer sales and witnessed 12.1% year-over-year growth in first quarter.  While the laser printer market has flat lined at 40.4 million, Trefis estimates that Lexmark’s push in the sub-segment will result in improvement in its market share by 10 basis points to 4.61% by 2021.

Additionally, the company is offering managed print services (MPS), under which the procurement (of hardware and cartridges), maintenance (of printers and printing solutions) and other aspects of printing managed by Lexmark. As a result of these efforts, Lexmark’s MPS contracts have increased. This has positively impacted its printer supplies business. 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 in ISS division going forward. Due to MPS contracts, we expect Lexmark’s laser cartridge pricing to stabilize at $231. If Lexmark’s laser cartridge prices were to increase to $260, our stock price estimate can increase by 7%.

Additionally, the contribution from services to MPS business remains small. Currently, we forecast other parts and services revenue, which is primarily MPS revenues, to remain flat at $187 million.  However, if Lexmark bags more MPS contracts then this figure can be significantly higher.

Acquisition To Drive Growth At Perceptive Software

The Perceptive software division is the second biggest business unit and makes up 8.7% of Lexmark’s estimated value. As Lexmark plans to become an end-to-end solution provider, 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 content and process management software markets that Lexmark participates in are projected to grow in aggregate approximately 11% annually over the next several years. Currently, we expect Preceptive’s revenues to grow from $313 million in 2014 to over $500 million by 2021. However, with the  Kofax deal is completed the revenues from this division will increase by 100% as Kofax  generated $297 million in revenues in 2014. We also expect the seamless integration of Perceptive’s array of solutions with MPS to bolster revenue for the company. Moreover, 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 $1.2 billion, our stock price can potentially increase by 5%.

You can drag the trend lines in the interactive charts above to see how various scenarios for laser printer market share, cartridges per laser printer and Perceptive software revenues affect Lexmark’s stock value.

We currently have a $42.48 Trefis price estimate for Lexmark, which is 7% above its current market price. We are in the process of factoring in revenues from the Kofax into our model.

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1. Worldwide Hardcopy Peripherals Market Shows a Small Dip in the First Quarter of 2015, According to IDC, May 21 2015, www.idc.com [↩]