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LXK: Lexmark Sells Less, Makes More

Printer manufacturer Lexmark International (LXK) said first-quarter quarter profit rose, beating expectations, helped by a 42 percent drop in inkjet printer sales.

You read that right. Since printer makers typically lose money on printers (hoping to make up for it in future sales of ink or toner) the fewer printers they sell in a given quarter, the more money they make.

Of course, if the model is working the lower sales today would translate into lower future profits, as the unsold printers will not require ink refills. Part of Lexmark’s current problem appears to be a decision by Best Buy (BBY) to at least temporarily eliminate Lexmark printers from their stores.

Lexmark still has lots of cash on the balance sheet and is now trading at a 12.3% free cash flow yield, which offers room for a decent return even if the company’s earnings decline over time. It remains, in my opinion, worth a look for value investors. However, it offers a bumpy ride – and I’d like to see it hold the 50 day moving average as evidence against the stock being a value trap.

Disclosure: At time of publication, William Trent has no position in the companies mentioned in this article.

Topics: Lexmark (LXK) | No Comments

LXK: Timing is Everything on Lexmark Call

In December I thought Lexmark (LXK) might be worth a look for value investors. That call is looking much better since Lexmark reported earnings this morning:

Fourth-quarter revenue was $1.31 billion, down 4 percent compared to revenue of $1.37 billion last year. Fourth-quarter GAAP earnings per share were $1.04. Earnings per share for the fourth quarter of 2007 would have been $1.29 excluding $0.25 per share for restructuring-related activities.

The $0.58 consensus estimate was blown away, and guidance of $0.80-$0.90 for the coming quarter (ex. restructuring charges) was also ahead of the $0.80 consensus. Since I originally recommended the stock, it is down 1.5%, but that compares favorably to the 8.7% decline in the S&P 500.

Topics: Computer Peripherals, Lexmark (LXK) | 1 Comment

LXK: Does Lexmark The Spot at Current Levels?

The following is a reprint of my December 12, 2007 RealMoney column

Printer manufacturer Lexmark, Inc. (LXK) started out this year at $73 and hasn’t looked back. Unfortunately, its motion has all been to the downside. Now less than half the stock it used to be, is it time to consider a nibble?

The stock is certainly cheap enough. Not only is it trading at a mere 12x expected earnings, $6.60 of the $34.50 current valuation is literally cash in the bank.

Over the last 12 months, Lexmark has brought in cash from operating activities totaling nearly $500 million and used less than $200 million for capital expenditures, resulting in free cash flow of $309 million and a FCF/Enterprise value yield of 11% – a very juicy premium to the current Treasury yield.

Of course, any juicy reward is bound to come with some risks, so let’s take a good hard look at those.

Second Fiddle

Even before Hewlett Packard’s (HPQ - Annual Report) recent resurgence, Lexmark was a distant runner-up in the printer business. Lexmark countered this position by forging an alliance with Dell (DELL) under which Lexmark makes all of the Dell-branded inkjet printers and half of their laser printers. Unfortunately for Lexmark, they inked that deal just in time for Dell to start its own tailspin.

Then, even if Hewlett Packard were to falter there are plenty of other competitors in the wings. First there are the traditional rivals like Seiko Epson (SEKE.Y) and Canon (CAJ), and Brother (BRTHY). Then, converging technologies have made competitors out of Ricoh (RICOY), Xerox (XRX), Samsung, and Kyocera Mita (KYO).

Declining Business

Everyone knows that obsolescence is a key risk for technology companies, and Lexmark is currently feeling the pain of the industry’s ongoing shift from inkjet to laser technology. I’ll let Lexmark explain it themselves (courtesy of the latest 10Q filing:)

Lexmark believes it is experiencing shrinkage in its installed base of inkjet products and an associated decline in end-user demand for inkjet supplies. The Company sees the potential for continued erosion in end-user inkjet supplies demand due to the reduction in inkjet hardware unit sales reflecting the Company’s decision to focus on more profitable printer placements, a mix shift between cartridges resulting in a higher percentage of moderate use cartridges and the weakness the Company is experiencing in its OEM business. Additionally, Lexmark expects to see continued declines in OEM unit sales, aggressive pricing and promotion activities in the inkjet and laser markets….

As the Company analyzes the situation, it sees the following:

  • Some of its unit sales are not generating adequate lifetime profitability due to lower prices, higher costs and supplies usage below its model.
  • Some markets and channels are on the low-end of the supplies generation distribution curve.
  • Its business is too skewed to the low-end versus the market, resulting in lower supplies generation per unit.

Cheap Enough?If the risks haven’t sent you running for the hills, you are probably wondering whether the current share price is cheap enough to justify taking those risks. With the prospects for a decline in sales, earnings and cash flow being more than a distinct possibility, any price paid is going to have to be justified for a declining business.

The traditional valuation model says that value is equal to the cash flow in the coming year, divided by the difference between the company’s cost of capital and its growth rate. The 11% free cash flow yield I calculated above is a version of this model, and it provides the denominator in the equation: lexmark’s return, less its growth rate, should equal 11%.

Since the growth rate is negative, the return will be something less than 11%. If the current declines of approximately 3%, the implied return works out to 8%. That probably doesn’t sound like a huge payoff for many investors, but it is still a nice premium to Treasuries. Depending on the outlook for the rest of the market, value investors might find it worth a shot.

Topics: Brother (BRTHY), Canon (CAJ), Computer Hardware, Computer Peripherals, Dell (DELL), Hewlett Packard (HPQ), Kyocera Mita (KYO), Lexmark (LXK), Office Equipment, Ricoh (RICOY), Seiko Epson (SEKE.Y), Xerox (XRX) | 1 Comment

28 Stock Ideas from the Durable Goods Report

This article was originally published at RealMoney on September 26, 2007.

My article last week about mining the PPI report for stock ideas was so well received I thought I’d share another of my favorite taxpayer-provided idea generators, the durable goods report. Published by the U.S. Census Bureau, the report has a similar breakdown by industry of durable goods orders, shipments, inventories and backlog.  I came away with 28 potential ideas for further research.

In line with much of the recent economic data, the headline durable goods number was weaker than expected. To quote from the report, “New orders for manufactured durable goods in August decreased $11.3 billion or 4.9 percent to $219.5 billion, the U.S. Census Bureau announced today…. Shipments of manufactured durable goods in August, down two of the last three months, decreased $3.4 billion or 1.6 percent to $216.7 billion.”

But in this case, I think focusing on the forest means you could miss out on some of the more attractive trees. I gathered the data from the Census Bureau and created charts showing the year/year change in durable goods statistics for a variety of industries hoping to find some areas worth further consideration. Keep in mind, this is an initial screen for idea generation, not a full-fledged analysis of any of the names. You wouldn’t want to buy the stocks listed here without further research. That caveat aside, let’s look at some of the better performing industries.

First up is technology – computers and electronic products. Although 3.3% order growth year/year and essentially flat shipments may not be the type of growth investors typically look for from tech, it is a clear improvement from recent months. Inventories are starting to be drawn down and backlog remains strong.

computersandelectronics.jpg

But there are areas of strength and weakness within tech. Specifically, computers (and related products) themselves are starting to look strong, with backlog headed through the roof and inventories in check.

computersandrelated.jpg

The fairly obvious stock ideas from this industry include Apple (AAPL), IBM (IBM - Annual Report) and Hewlett Packard (HPQ - Annual Report). If things keep getting better (and the company figures out how to file its required regulatory reports) Dell (DELL) might even look interesting again. Stretching a bit further, Sun Microsystems (a href="http://stockmarketbeat.com/blog1/category/tech/sunw/">SUNW - Annual Report) and Lexmark (LXK) come to mind. And don’t forget the storage plays, which also showed up on the PPI hotlist. The names I mentioned then were Brocade (BRCD), EMC (EMC - Annual Report), Iomega (IOM), Hutchinson (HTCH), Quantum (QTM), SanDisk (SNDK - Annual Report), Seagate (STX - Annual Report) and Western Digital (WDC).

Communications equipment is also showing some signs of strength. Though the latest month was down, the trend seems to be up.

communicationsequipment.jpg

I have actually analyzed Motorola (MOT - Annual Report), so that would be a play to include here. Cisco (CSCO), Research in Motion (RIMM), 3Com (COMS), Nokia (NOK) and Corning (GLW - Annual Report) also come to mind.

And finally, turning away from technology, I hope you didn’t think the aircraft boom was over. If anything, it looks to be picking up steam.

non-defenseaircraft.jpg

defenseaircraft.jpg

Ways to play this include Boeing (BA - Annual Report), Embraer (ERJ), General Dynamics (GD - Annual Report), United Industrial (UIC) and Cessna parent Textron (TXT). Parts suppliers include Rockwell Collins (COL), Curtiss Wright (CW - Annual Report), and LMI Aerospace (LMIA).

So there you have it: 28 potential stock ideas from what looked at first glance to be a negative report on durable goods.

Disclosure: Long RIMM put options at time of publication.

Topics: 3Com (COMS), Aerospace and Defense, Apple (AAPL), Boeing (BA), Brocade (BRCD), Capital Goods, Cisco Systems (CSCO), Communications Equipment, Computer Hardware, Computer Peripherals, Computer Storage Devices, Corning (GLW), Curtiss Wright (CW), Dell (DELL), EMC Corp. (EMC), Embraer (ERJ), General Dynamics (GD), Hewlett Packard (HPQ), Hutchinson (HTCH), IBM, Iomega (IOM), LMI Aerospace (LMIA), Lexmark (LXK), Motorola (MOT), Nokia (NOK), Quantum (QTM), Research in Motion (RIMM), Rockwell Collins (COL), Sandisk (SNDK), Seagate (STX), Sun Microsystems (SUNW), Textron (TXT), United Industrial (UIC), WDC | No Comments

EMC: Wasn’t Tech Spending Accelerating?

EMC (EMC - Annual Report) reported earnings this morning, and their sales of $3.12 billion were higher than consensus of $3.07 billion and earnings per share of $0.16 beat the $0.15 consensus. So why did the guidance for the full year (now half over) fall short of consensus?

Consolidated revenue for 2007 is expected to exceed $12.7 billion.
GAAP diluted earnings per share for 2007 are expected to exceed $0.64.

The consensus estimates were $12.78 billion and $0.68. When I previewed this week’s earnings reports I said EMC provides a decent look at enterprise tech spend. Other reports I have seen indicate that tech spending is improving, not slowing. Is EMC being too conservative, are they losing share, or are the other indicators giving a false reading?

Topics: Computer Storage Devices, EMC Corp. (EMC), Technology | No Comments

LXK: Lexmark Doesn’t Disappoint When it Comes to Disappointing

Lexmark International, Inc. (LXK) today announced financial results for the second quarter of 2007. Second-quarter revenue was $1.208 billion, down 2 percent compared to revenue of $1.229 billion last year and in line with the recently lowered guidance. Second-quarter GAAP earnings per share were $0.67. Earnings per share for the second quarter of 2007 would have been $0.65 excluding a net $0.02 per share benefit from restructuring-related activities. Second-quarter 2007 GAAP and non-GAAP earnings per share include a tax benefit of about $0.05 per share.

When I previewed the report, I said they would probably offer poor guidance. And that was one prediction on which Lexmark did not disappoint.

In the third quarter of 2007, the company expects revenue to be down in the low- to mid-single digit percentage range year over year. It expects third-quarter 2007 GAAP EPS to be in the range of $0.00 to $0.10 per share.

Wall Street was expecting a 3% revenue decline and $0.15 in EPS.

Topics: Computer Peripherals, Lexmark (LXK), Technology | No Comments

The Week Ahead – 21 July 2007

The Economic Calendar is quiet in the early part of this week but there are important reports at the end of the week. On Thursday is the Durable Goods report, for which the consensus estimates a 2.0% increase. On Friday is the Preliminary Estimate of 2Q GDP, which the consensus has pegged at 3.2%. That sounds a little high to me based on the economic data table I’ve been compiling.

EconomicData

Bad and Deteriorating Bad but Improving Good but Deteriorating Good and Improving
Existing Homes (June) Chicago Fed NAI (May) Consumer Confidence (June) Real Disposable Income
Employment (June) Durable Goods (June) Personal Spending (June) ISM Manufacturing (July)
New Home Sales (June) Construction Spending Retail sales (August 2007) ISM Services (June)
ATA Truck Tonnage (June) CPI (July 07) Leading Indicators (June)  
GDP (Q2 Advance) Trade deficit (July 07)    
PPI (July 07) Durable Goods (July)    
Industrial Production (July 07)      
Housing Starts (July 07)      
       
       

The Earnings Calendar is as busy as it can get. Some of the names I’ll be watching:

Monday

Tuesday

  • CH Robinson (CHRW - Annual Report) – estimates have been rising and now stand at $0.47, but Landstar (LSTR - Annual Report) disappointed.
  • CDW Corporation (CDWC) – stellar monthly sales reports have kept estimates rising. They now stand at $0.97.
  • EMC Corporation (EMC - Annual Report) – The big news is still the VMWare IPO, but it is also a decent look at enterprise tech spend.
  • Laboratory Corporation of America (LH) – The Mid Cap and Large Cap Watch List (Track at Marketocracy) member has been seeing positive earnings revisions and is now expected to earn $1.09 on $1.03 billion in revenue.
  • Lexmark (LXK) preannounced and will probably offer poor guidance.
  • Linear Technology (LLTC) – expected to earn $0.35 on $267 million in sales.
  • Norsk Hydro (NHY) – The Large Cap Watch List (Track at Marketocracy) member has no analyst coverage right now.
  • Plantronics (PLT) – my covered call position is now being cashed out so I’ve no skin in this one. But it is often volatile.
  • United Parcel Services (UPS) is a great read on the health of the economy. Expectations are $1.03 on $12.23 billion in revenue.

Wednesday

Thursday

Disclosure: William Trent has a long position in SMH.

Topics: Air Courier, Altera (ALTR), Basic Materials, CDW Corp (CDWC), CH Robinson Worldwide (CHRW), Colgate Palmolive (CL), Communications Equipment, Computer Hardware, Computer Peripherals, Computer Storage Devices, Conglomerates, Consumer Non-cyclical, Corning (GLW), Durable Goods, EMC Corp. (EMC), Economy, Electronic Instruments and Controls, Federated Investors (FII), Financials, Freeport McMoRan (FCX), GDP, Graco (GGG), Healthcare, Healthcare Facilities, Hexcel (HXL), Ingram Micro (IM), Investment Services, Iron and Steel, Laboratory Corp. of America (LH), Large Cap Watch List, Lexmark (LXK), Linear Technology (LLTC), MEMC Electronic Materials (WFR), Metals and Mining, Mid Cap Watch List, Miscellaneous Capital Goods, Miscellaneous Transportation, Norsk Hydro (NHY), Personal and Household Products, Plantronics (PLT), Retail (Catalog and Mail Order), Semiconductors, Services, Small Cap Watch List, Steel Dynamics (STLD), Stock Market, Technology, Texas Instruments (TXN), Transportation, United Parcel Service (UPS), Watch List, Xerox (XRX), Xilinx (XLNX) | 3 Comments

LXK: My Close Call on Lexmark

Even though I knew printer maker Lexmark (LXK) is always prone to tripping up, I recently took a chance on the name by selling put options that would have required me to pay $50 per share had the shares fallen below that level prior to June 18. Today, the company announced that earnings won’t be as high as they had hoped for the current or next quarter, at least:

Lexmark International, Inc. (NYSE: LXK) today announced that financial results for its second quarter of 2007 will be lower than expected.  Although based on partial data for the quarter, the company expects its second-quarter revenue to decline about 2 percent year over year. It expects its GAAP earnings per share to be in the range of $0.64 to $0.69. Excluding net restructuring-related benefits, the company expects earnings per share to be in the range of $0.62 to $0.67. Both of these earnings per share ranges include an expected tax benefit of about $0.05 per share. This compares to the $0.82 to $0.92 earnings per share guidance it provided for the second quarter.

As compared to the company’s guidance for the second quarter, the earnings per share impact is due to a shortfall in operating income in the consumer market segment. This shortfall is primarily due to less than expected inkjet supplies revenue, lower hardware average unit revenue driven by aggressive pricing and promotion, some greater than expected product costs, and greater than expected branded inkjet unit growth.

Looking ahead, the company expects these same factors to impact the third quarter. In the third quarter of 2007, although the analysis is not yet complete, the company currently expects earnings per share to be around $0.00 to $0.10. The company plans to release second-quarter earnings on July 24, 2007.

My put options expired, so I was able to keep the premium on them and am no longer obligated to buy the shares several points higher than they are trading off of this news. I’m glad the stock market isn’t like horseshoes.

Topics: Lexmark (LXK) | 1 Comment

LXK: Lexmark Trips Up

When we previewed earnings this week we said “Lexmark (LXK) – Estimates are doable but we’re always waiting for this company to trip up.” Right on cue, the company tripped up.

Lexmark reports first quarter results:

Lexmark International, Inc. (NYSE: LXK – News) today announced financial results for the first quarter of 2007. First-quarter revenue was $1.261 billion, down 1 percent compared to revenue of $1.275 billion last year. First-quarter earnings per share were $0.95. Earnings per share for the first quarter of 2007 would have been $0.96 excluding $0.01 per share restructuring-related charges. First-quarter 2006 earnings per share were $0.78. Earnings per share for the first quarter of 2006 excluding $0.31 per share restructuring-related charges and $0.06 per share pension curtailment gain would have been $1.03.

Consensus estimates called for $1.03 on $1.26 billion in sales. For next quarter the Street was expecting $1.00 in EPS on $1.24 billion in sales, which will also be missed:

In the second quarter of 2007, the company expects revenue to be down in the low- to mid-single digit percentage range year over year. It expects second-quarter 2007 EPS to be in the range of $0.82 to $0.92. EPS in the second quarter of 2006 were $0.74, or $1.09 excluding $0.35 per share restructuring-related charges.

Challenges included OEM unit sales that continued to be weak, declines in inkjet supplies sales, and hardware pricing that was fairly aggressive in both laser and inkjet markets,” [CEO Paul] Curlander said.

In particular, the OEM with the weak sales is Dell (DELL), with whom Lexmark has a distribution arrangement. Given the well-known weakness at Dell it is somewhat surprising Lexmark shares had done as well as they did. Our experience with Lexmark over the last four years has taught us that the only thing we can count on is not to count on anything.

Topics: Dell (DELL), Lexmark (LXK), Stock Market | 1 Comment

The Week Ahead (22 April 2007)

The Economic Calendar is relatively light this week. Potential market movers include:

  • Wednesday’s Durable Goods report (consensus 2.2%)
  • Friday’s advance report on Q1 GDP (consensus 1.8%)

Earnings are another story. We are in the peak part of earnings season this week. A few of the stocks we follow:

Monday

  • Altera (ALTR) – valuation is rich but looks set up to beat on earnings.
  • Texas Instruments (TXN - Annual Report) – March and June quarters have both had significant downward revisions. Will day of reckoning be forestalled?

Tuesday

  • AU Optronics (AUO) – Forecasting losses, but panel business may have bottomed out.
  • CDW Corporation (CDWC) – 14.6% sales growth doable given Berbee acquisition.
  • CH Robinson (CHRW - Annual Report) – Could beat.
  • CSG Systems (CSGS) – earnings should be a piece of cake. If private equity buyers don’t take them out they’ll do it themselves the slow way.
  • Lexmark (LXK) – Estimates are doable but we’re always waiting for this company to trip up.
  • ST Microelectronics (STM) – Doing the right thing. Hopefully will pay off.
  • AT&T (T - Annual Report) – Estimates and stock both keep rising.

Wednesday

  • Apple (AAPL) – Hunch: company will blow away earnings, issue horrible guidance and blame it on iPhone build.
  • Arkansas Best (ABFS) – We’re staying away from truckers who own trucks.
  • Corning (GLW - Annual Report) – current quarter ok, guidance at risk.
  • LSI Logic (LSI) – May blame their poor guidance on Agere.
  • Maxim (MXIM) – Company is out of gas but focus will be on whether they might sell out.
  • Qualcomm (QCOM) – Nokia Nokia Blah Blah Nokia ad nauseam (excerpt from pending conference call transcript)
  • Silicon Laboratories SLABSold wireless just when biggest customer began to recover. What other surprises may be in store?
  • UPS (UPS) – They shouldn’t have trouble beating the estimates (but that doesn’t mean they won’t).
  • Xilinx (XLNX) – Altera with more risk to the earnings target.

Thursday

Friday

  • Dassault Systemes (DASTY) – We like Ansys (ANSS) better but don’t see why this name wouldn’t beat.
  • Ceradyne (CRDN)  – Earnings could be anywhere and don’t really matter.

Enjoy!

Disclosure: William Trent has a long position in SMH.

Topics: ANSYS (ANSS), AT&T (T), AU Optronics (AUO), Altera (ALTR), Apple (AAPL), Arkansas Best (ABFS), CDW Corp (CDWC), CH Robinson Worldwide (CHRW), CSG Systems (CSGS), Ceradyne (CRDN), Corning (GLW), Curtiss Wright (CW), Dassault Systemes (DASTY), KLA-Tencor (KLAC), LSI Corp. (LSI), Lexmark (LXK), MEMC Electronic Materials (WFR), Maxim Integrated Products (MXIM), McAfee (MFE), Microsoft (MSFT), Qualcomm (QCOM), STMicroelectronics (STM), Sandisk (SNDK), Silicon Laboratories (SLAB), Stock Market, Texas Instruments (TXN), United Parcel Service (UPS), Watch List, Xilinx (XLNX), YRC Worldwide (YRCW) | 4 Comments