Thursday, December 01, 2005

Whither Lexmark?

When Lexmark pre-announced a truly horrific quarter the first week of October—on a $100 million revenue miss (out of $1.2 billion in revenue) the company guided operating income down by, well, $100 million.

In other words, every dollar of lost sales cost the company a dollar in operating income.

And it would have been worse if the company hadn’t gotten a $35 million pre-tax benefit from some inventory shuffling within its supply chain that was not disclosed until the 10Q came out November 1.

I can’t recall a company—at least since the dot-com days—that reduced net income guidance by more than its revenue shortfall.

At an analyst meeting on November 15, Lexmark management was long on buzzwords (“distributed output market” “vertical integration” “cost and price performance”) and short on specifics, although, to be fair, the company had warned ahead of time that it was not going to "address business conditions" at the meeting.

Which was probably wise, because "business conditions" for Lexmark aren't too perky.
A look at Amazon’s Top Sellers in the inkjet printer category brings up no Lexmark product in the Top 10 or even the Top 50 sellers. The first Lexmark appears at number 58, behind pretty much every other brand in the business.

As for the brick and mortar side of retailing, Lexmark’s performance during the crucial holiday season won’t be known for a few more weeks—but Target was selling a Lexmark model for all of $17 on Black Friday.

Hardly the mark of a hot product.

Why then has Lexmark’s stock price risen 15% from its get-me-out-before-I-have-to-show-this-pig-on-my-sheet-at-the-end-of-the-month late October low?

Because talk of a leveraged buyout has been making the rounds.

On November 10, Sanford Bernstein analyst Toni Sacconaghi (who, for the record, was recommending Lexmark strongly prior to the blow-up) raised the notion that an LBO of Lexmark “appears economically viable,” citing the company’s “strong cash generation” and the potential for a divestiture of the money-losing inkjet business in order to “milk the supplies annuity on its existing installed base [of printers].”

At yesterday’s close of $47.62, Lexmark shares are approaching the price Sacconaghi had derived when he expressed his opinion that an LBO buyer might pay a 20% premium to the $42 stock price, despite a total absence of decent news regarding Lexmark, the printer business, or consumer electronics outside of iPods and plasma television sets.

Clearly somebody in the this-cash-is-burning-a-hole-in-our-pockets world of private equity is doing some serious homework on Lexmark.

Anybody with an informed opinion on what the answers might be would be welcome.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.


Bill said...

A little off topic.

It looks like the "So..." virus has infected even your beloved Google:


This all-purpose word is not a word at all. It’s the sound of an engineer clearing his or her throat before beginning to speak. The first week I worked at Google, it seemed like some sort of linguistic virus had infected all the technical staff. Every sentence in every conversation began, “So…” So… I eventually got used to it."

Greenmartian said...
This comment has been removed by a blog administrator.
shortseller said...

So, Greenblatt's new screening tool puts Lexmark in its top 100 values. The method behind the madness is hidden from view, but the recs are supposed to be updated daily. Curiously, WEBX is in there too.

justanotherhedgie said...

LBO for LXK?

Consumables, which account for a full 60%+ of LXK's net revenue (and most of that "strong cash generation") are being adversly impacted by: a mix shift to lower-priced SKU's that hold less ink; less home printing - as the mix of PC sales shifts to notebooks (which have a lower attach rate); and as consumers print more photos at retail or post them online (flickr, picassa, ofoto, etc).

Likewise, LXK appears to also be impacted by a consumer shift to lower priced third party consumable manufacturers like as well as aggressive promotions & discounting by competitor HPQ as it strives to maintain margins & market share. where is the value in that supplies business again? besides, i don't know ANYONE (business or individual) who owns a Lexmark who the hell is buying their supplies?? and doing it so regularly that it is "annuity-like"?!? christ! its cheaper these days to buy an entirely new printer every year!

stick a fork in this one...its done. whither the PE firm who steps in front of the bus.

justanotherhedgie said..., "withered is the PE firm..."

Jeff Matthews said...

"justanotherhedgie" et al: I think Lexmark as well as HP are victims of a couple of things.

1. Go anywhere--Disney World, a school play, NYC--and see how many people are taking pictures with their cellphones. They send them around via email. They don't print 'em.

2. Those family photos printed on the entire first generation of color printers are now fading. Makes people wary of the whole print-your-own thing.

3. My daughters don't print pictures anyway--they just send them around on the internet.

Meanwhile, HP has its act together, and Epson has terrific new products taking big share at places like Best Buy.

So who wants to buy a Lexmark, even for $17 at Target?

Which explains the sudden downturn in Lexmark's business--including the problems with formerly cash-cow supplies.

The question is, who is looking to buy Lexmark here, and what price are they willing to pay for it?

Huggy said...

I work for Lexmark, as a field sales rep or at least I still do technically. My hours have been slashed and most of the sales team got laid off.

Fact is that Lexmark has deep structural problems and its been going on for a long time. This holiday season just passed was lousy and the reason why is that Lexmark products have been unable to innovate to the same level as the competition, namely HP and Epson. Another element is the totally flawed marketing strategy of photo printing. Fact is most consumers are not printing photos and even if they were the quality of printing from Lexmark is so poor compared to the competition few people will buy the products.

Funny thing is sales teams on the ground level like the one I work in reported these problems for the past year and nobody at Lexmark HQ seemed to want to do anything about it.

As it is Lexmark's reputation with many consumers was one of high ink costs and poor quality, the company has never really been able to undo this and indeed has sometimes tried its best to maintain the poor image. Days on the sales floor for me were a constant struggle against this image.

With third party ink vendors selling good replacement inks I dont think that Lexmark can stay in business. For a company like HP they use their printer division to sell other HP products like cameras and the like, but for Lexmark there is only printers and I think the whole future ink sales strategy has backfired badly. It used to be we'd be selling printers for almost nothing and I guess the execs thought the ink sales would come rolling in. But what has been happening is that people have gotten the free printer and then thrown it out when the ink ran out.

linda said...

Lexmark has a very good product, but they have a marketing issue. If they could learn how to market their product they could be possibly number 1 in the industry.
I have Lexmark Printers at home and continue to purchase them, however, your ink cartridges are too expensive. If you changed the way you do business with the product side there is another plus to be added to your production and sales. lgp