88% of Lexmark’s value comes from the Laser Printers & Cartridges business. The company’s value is largely dependent on the margin for its laser printers and cartridges business which are higher than the margins in its inkjet business.
Laser EBITDA margins have declined from 27% in 2005 to 17% today primarily as a consequence of declining revenues caused by falling cartridge prices and declines in Lexmark’s laser market share.
We expect a partial recovery of Lexmark’s laser margins as revenue declines slow followed by revenue growth as the company’s R&D investments lead to more competitive products that allow Lexmark to sustain market share.
Despite this there is a risk that margins could decline to levels comparable to inkjet margins due to:
(i) slower growth in printer / printing demand as consumers and businesses become more “paperless”
(ii) faster than expected erosion in cartridge pricing as low cost third-party cartridges force branded cartridge makers to lower pricing
How much do you think the $32.74 Trefis price for Lexmark would decline if Lexmark’s Laser EBITDA margins were 16% instead of 20% by the end of the Trefis forecast period?
A. 15% (to $28)
B. 30% (to $23)
C. 45% (to $18)
D. 60% (to $13)
Make a selection above and then modify the last forecast year to 16% to see the answer.
