Monday, October 19, 1998
Lexmark International
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Phone: 606-232-2000
Website: http://www.lexmark.com
Price (10/16/98): $65 1/16
HOW DID IT DOUBLE?
This Big Blue baby is bouncing. Ever since IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %> spun off the printer specialist three years ago, Lexmark <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LXK)") else Response.Write("(NYSE: LXK)") end if %> has been looking as vibrant as a 1200 x 1200 printout from its Lexmark 7000 series.
From earning just $0.44 a share in 1995, the year IBM took the company public, Lexmark has gone on to earn $1.69 per share in 1996, $1.98 per share last year, and is on track to earn $3.21 a share this year.
While computer peripherals are often susceptible to fickle consumer demand shifts and industrywide cutthroat discounting, Lexmark has shown consistent sales growth to go along with the explosive bottom-line gains.
Sporting rich margins, pursuing share buybacks, holding a niche among first-time computer shoppers looking for a budget printer as well as the high-end, and making strides in new product innovation -- Lexmark has all this going for it, including a recent wave of capital appreciation to boot.
BUSINESS DESCRIPTION
Lexmark makes laser, inkjet, and dot matrix printers for both the home and office markets. The company derives its name from its headquarters in Lexington, Kentucky.
The company also sells printer accessories and has international manufacturing centers in Mexico, Australia, Scotland, and France.
FINANCIAL FACTS
Income Statement
12-month sales: $2723.2 million
12-month income: $201.3 million
12-month EPS: $2.76
Profit Margin: 7.4%
Market Cap: $4645.5 million
Balance Sheet
Cash: $34.3 million
Current Assets: $880.3 million
Current Liabilities: $557.6 million
Long-term Debt: $148.5 million
Ratios
Price-to-earnings: 23.6
Price-to-sales: 1.7
HOW COULD YOU HAVE FOUND THIS DOUBLE?
When heavily invested shareholders decide to sell, it's not uncommon to stage a public offering. Underwriters are brought in and the secondary deal helps stabilize the share price despite the shareholders' exodus. This was the case for Lexmark in March 1998. There was a 7.7 million share public offering that was eventually priced at $45.
While corporate insiders often take advantage of these offerings to publicly dispose some of their shares, Lexmark management chose not to participate. As a matter of fact, they wound up buying another 2 million shares from the exiting shareholders at $43 3/8 a share (which was what the sellers netted after offering fees).
For Lexmark executives to refrain personally from the chance to sell shares was comforting. But the gutsy show of internal confidence to go out and buy some of those shares back at the time was more than commendable. The former hinted that insiders thought the shares were not overvalued. The latter hinted that insiders thought the share were actually undervalued.
WHERE TO FROM HERE?
Things have been running smoothly for Lexmark. Margins have improved as the company has grown the sales of accessories that carry juicier markups than the printers themselves. That is why the clearing out of the obsolete Lexmark 1000 printers and the Lexmark 1100 printers that are being priced at just under $100 after rebates are not bad moves at all. Sell quality on the cheap and let the patrons pay full price on the printer cartridges.
Lexmark has also managed to hold up relatively well with the recent Asian economic debacle. It hasn't been perfect since the company has had to deflate international sales to account for currency translations. However, given the company's global operations, favorable tax status overseas has dropped the company down to the 34% tax bracket from the 37% it has paid the year before.
Beyond the successful inkjet and laser economy lines and the high-end high resolution segment, the company is also well ahead of the times despite the fact that it still makes dated dot matrix printers.
Earlier this month The Wall Street Journal reported that the company was getting ready to introduce a printer that would allow direct input from digital cameras. No mediating computer need apply. With the respectable quality of inkjet printers, users will in essence be buying a photo lab for all of $349 -- including regular printer functions.
Lexmark is also taking a page from the Dell and Gateway PC playbook and has introduced a leasing program to help drum up larger ticket item sales.
So Lexmark is achieving success in the blandest of computer peripheral markets. Then again, the company's management knew this would happen -- that is why they were buying in earlier in the year.
-Rick Aristotle Munarriz
([email protected])