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Analyst Blog

On May 23, 2013, we retained our Neutral recommendation on printing solutions provider Lexmark International Inc. (LXK - Analyst Report). On Apr 23, Lexmark posted mediocre first quarter 2013 results with revenues and earnings per share declining on a year-over-year basis. The quarter’s adjusted earnings of 88 cents surpassed the Zacks Consensus Estimate but revenues missed it.

Lexmark delivered positive earnings surprise in the last quarter, with an average beat of (2.81%) for the past four quarters. Currently, Lexmark has a Zacks Rank #3 (Hold).

Why a Neutral Stance?

Revenues declined 10.9% year over year, which was mainly due to weakness in Europe, its exit from the Inkjet business and lower demand due to increasing usage of digital content through mobile devices. However, decent growth in Perceptive Software and Managed Printing Services (MPS) provided good support. Currency headwinds were limited.

Gross margin was down 60 basis points from the year-ago quarter on lower revenues and unfavorable product mix.

On the other hand, Lexmark showed strength in keeping its operating cost down. Total operating expense of $280.6 million decreased 3.9% from the year-ago quarter. Cost optimization was per the restructuring plan announced in Aug 2012 and the company seems to be well on track.

Guidance for the second quarter and fiscal 2013 was not encouraging but the company’s optimism for secular shift toward software and solutions from core hardware business were encouraging. The company also expects a better demand for its Laser supplies.

We believe that the digitization of content, sluggish economic environment and stiff competitive scenario are concerns. But we remain encouraged by Lexmark’s endeavor to shift more toward software space through back-to-back acquisitions. Also, Lexmark’s growing exposure into the MPS space will serve as a catalyst, going forward.

Estimate Revisions

Over the last 30 days, the Zacks Consensus Estimate for 2013 and 2014 decreased 1 cent and 4 cents to $3.72 and $3.58 per share, respectively. One estimate each for 2013 and 2014 was revised downward in the last 30 days.

Other Stocks to Consider

Other stocks in the technology sector that are currently performing well include Hewlett-Packard Co. (HPQ - Analyst Report), NetApp Inc. (NTAP - Snapshot Report) and Micron Technology Inc. (MU - Analyst Report). All these companies carry a Zacks Rank #2 (Buy).

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