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Market Intelligence Center  Dec 5  Comment 
The option-trade picking algorithms behind MarketIntelligenceCenter.com's Artifical Intelligence Center have selected a covered-call trade on Lexmark International Inc. (LXK) that includes 9.02% downside protection. Sell one contract of the Apr....
Market Intelligence Center  Nov 4  Comment 
Lexmark International Inc. (LXK) traded between $43.20 and $44.43 before closing at $43.40 Monday and presents some attractive trading opportunities today. MarketIntelligenceCenter.com’s algorithms have picked a Apr. '15 $42.00 covered call for...
SeekingAlpha  Oct 21  Comment 
By SA Transcripts: Lexmark International, Inc. (NYSE:LXK) Q3 2014 Earnings Conference Call October 21, 2014 8:30 AM ET Executives John Morgan – Investor Relations Paul Rooke – Chief Executive Officer and Chairman Gary...
TheStreet.com  Oct 21  Comment 
NEW YORK (TheStreet) -- Shares of Lexmark International Inc. are higher by 8% to $42.80ain late morning trading on Tuesday, after the company reported an increase in net income for the 2014 third quarter to $37.9 million, or 60 cents per diluted...
MarketWatch  Oct 21  Comment 
Tech stocks mostly headed north in early trading Tuesday, led by Apple Inc. and upbeat reaction to the company's earnings results. Apple shares rose 2.4% to $102.10 after the company late Monday reported a fourth-quarter profit of $1.42 a share...
Benzinga  Oct 21  Comment 
Lexmark International (NYSE: LXK) reported better-than-expected profit for the third quarter. The Lexington, Kentucky-based company posted a quarterly profit of $37.9 million, or $0.60 per share, versus a year-ago profit of $34 million, or $0.53...
Wall Street Journal  Oct 21  Comment 
Market Intelligence Center  Oct 14  Comment 
After Monday’s trading in Lexmark International Inc. (LXK) the option-trade picking algorithms that power MarketIntelligenceCenter.com's Artificial Intelligence Center uncovered a trade that offers a 3.89% return, or 14.94% annualized (for...




 

Lexmark International Inc. (NYSE: LXK), famous for its award-winning technologies, is the fourth largest manufacturer of inkjet/laser printers and related ink/toner supplies. Yet in order to grow, Lexmark must grow its printer unit base, which promises to supply revenue for 3-4 years after each printer sale through continued purchases of related supplies. Recently, Lexmark has not been able to do this, and with a slowing hardware industry and severe competition, especially from industry leader Hewlett-Packard Company (HPQ). The decreased demand for printers serves as a breeding ground for intense pricing pressures on the printers. Lexmark has since been scrambling for retail shelf space and market share.

Recently, Lexmark increased its Research and Development spending to catch up with industry trends towards color, photo and multifunctional printers. But this does little to alleviate the threat from remanufacturers--refillers of Lexmark’s inkjet/toner cartridges who pose a potential threat to Lexmark’s existence.

Business Overview

Business Financials

LXK earned a total of 3.88 billion in total revenues in 2009. This was a decline from its 2008 total revenues of $4.53 billion in 2008. As a result, this had a negative impact on LXK's net income. Between 2008 and 2009, LXK's net income declined from $240 million in 2008 to $146 million in 2009.[1]

Business Segments

Lexmark was formed from IBM’s Information Products Corporation in 1990. It is now the fourth largest manufacturer of laser and inkjet printers and associated ink and toner supplies. Lexmark divides its business into the Consumer segment, which is made up of mostly inkjet product sales, and the Enterprise segment, which is made up of mostly laser product sales.

Revenue is almost evenly divided between the two segments; however, the enterprise segment (laser sales) accounted for two thirds of profits. Like other Original Equipment Manufacturers (OEMs), Lexmark will normally sell its printers (hardware) at a loss, with the intention of securing revenue and especially earnings from the sale of related ink cartridge and toner supplies. The sales of supplies generate profitable 60% margins, and have an extended recurring revenue stream of up to 3 or 4 years.

Business Strategies

Enterprise

Unlike its main competitor HP, Lexmark has the advantage of developing and owning its own printer and supplies technologies. In addition, Lexmark designs its printers with features and functionalities tailored to the productivity needs of individual fields (retail, government, pharmaceutical etc.).

Recently, the Business/Enterprise segment has also been expanded by Lexmark to include small and mid-sized businesses, the SMB market. In order to penetrate this market, Lexmark has turned out lower-priced laser products favored by SMB, and has chosen VARs (value-added resellers) for distribution instead of using direct sales or its partnerships with PC OEMs like Dell.

Consumer

In the consumer segment, Lexmark has historically focused on the low end of the market, but recently it has been turning out more higher-end "all-in-one" (AIO) inkjet printers.

Distribution/Partnerships

Although Lexmark manufactures its own laser toners and ink cartridges, it has its printers outsourced to Taiwanese original design manufacturers (ODMs).

Lexmark distributes its inkjet products through various channels. Although it does use the online channel, most products are sold via partnerships with superstore retailers (Comp USA, Staples and Office Max), consumer electronics stores (Best Buy, Circuit City) and mass-market retailers (Target, Wal-Mart). These retailers account for 80% of Lexmark’s consumer segment sales.

In the enterprise segment, Lexmark uses direct sales to communicate with its business customers, and distributors like Tech Data, Ingram Micro and Synnex account for 80% of enterprise sales. The remaining 20% of sales in both enterprise and consumer segments are through partnerships with PC OEMs Dell, Lenovo and IBM (see below).

Dell

Lexmark manufactures and sells its printers to Dell, its largest PC original equipment manufacturer partner, at discounted prices (less than the prices for retailers), who then resells them as Dell printers. The relationship with Dell began in 2003. Lexmark benefits from its relationship with Dell in two ways: 1) Dell, HP's archrival in the global PC Business, is giving Lexmark an extended arm into the small and mid-sized businesses (SMB) market, and 2) Dell’s market share gains translates into gains for Lexmark. But the news is not all good--Dell can and has leveraged pricing pressure on Lexmark in the past in order to compete with HP, and Lexmark risks dealing with a stronger future competitor in Dell, should the latter decide to end the partnership.

Printer bundles

In the past, Lexmark participated in printer bundles in which it offered its printers free with the purchase of a PC. But when the desired supplies revenue was not enough to offset the losses on the printers, Lexmark ceased offering these printer bundles. Dell had done the same thing with its own printer bundles one quarter before Lexmark, resulting in considerable share loss for Lexmark. While the printer bundles did not prove profitable, they did take up sizable retail shelf space, and their discontinuation spurred retailers to fill the empty spaces with products from Lexmark’s competitors.

Trends and Forces

Mounting pressures within the industry

It is well-known that the fate of the printing industry is dependent on a growing recurring profit base in supplies. Lexmark's weak past printer sales (especially in inkjets) are responsible for current weaker supplies revenue and profit declines. Attributed to declines in sales from its OEM partners and to continued falls in inkjet hardware sales, Lexmark's weakness in hardware sales are an important metric signaling near-future profit losses for the company.

While Lexmark has been trying to reverse this trend so that it may claim future market share, like its competitors, Lexmark is badly situated deep within a slowing hardware industry, a battle of price cuts from competitors desperate for market share, and pressure from new competition as well. HP is bent on winning the pricing game (and retail shelf space); new competitors like Eastman Kodak Company (EK), Memjet, and Samsung are also eager to play.

The good news is that the supplies segment has not yet been a real participant in the “battle of the prices.” But we could see this in the future, as the hardware industry becomes fully-grown.

Threat from third-party ink suppliers

Remanufacturers, or refillers of inkjet/toner cartridges, are a menacing threat to Lexmark’s business, as they take hold of its most profitable supplies segment. These refillers take the empty cartridges of printing OEMs like Lexmark and refill them with their own ink/toner for a reduced price. The cheaper, resold cartridges are not as high quality or as reliable, but remain a major problem for Lexmark.

Remanufacturers include retailers such as Staples and Office Depot, and supply stores such as Cartridge World. Knowing that it cannot beat them, Lexmark jumped in and joined them with a remanufacturing business of its own. By refilling only its own products, Lexmark buffered itself from potential hits coming from other remanufacturers.

More Colors, Photos and Functionalities

The printing industry landscape is undergoing changes. Some profit the consumer, like lower pricing on hardware; others resemble small fish bait for the printing companies. The industry is shifting towards laser multifunctional products (MFPs) and inkjet AIOs (All in Ones) that combine printing, copying, fax, and (for 4-in-1s) scanning capabilities. Color printers (especially high performance photo-capable printers) are also increasing in demand, due in part to the home-printing trend for digital photos. The increased use of color is the only bright spot for Lexmark, as color printers generate almost 3 times the supplies of monochrome printers.

Competition

HP is the industry leader in both the inkjet and laser markets, with a 40% share in lasers. Other competitors in the laser segment include smaller players Brother, Konica Minolta, Samsung, Oki and Kyocera Mita. Since the evolution of multifunctional printers with both printing and copying capabilities, laser competitors have also included copier companies Canon, Ricoh and Xerox.

References

  1. LXK 2009 Item 6 Pg. 23
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