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Lexmark Preview: Will It Beat?

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Lexmark International Inc. is set to report fourth quarter fiscal 2012 results on Jan 29, before the market opens. Last quarter, it posted a 20.5% positive surprise. Let’s see how things are shaping up for this announcement.

Growth Factors This Past Quarter

The printing industry is going through tough times with the ongoing macro softness. The sluggish economy in the U.S. as well as the Euro zone crisis has prompted many businesses to postpone big purchases until outlooks gain stability.

Consumers are reluctant to buy printers and so are enterprises, which have reduced IT spending. Moreover, demand for printers is slowing down due to increasing usage of digital content through mobile devices.

Last quarter, Lexmark reported an 11.2% year over year revenue decline due to lower hardware and supplies revenues. However, there was notable strength in its Software business, mostly led by growth in the Perceptive Software segment.

During the quarter, unfavorable mix (higher mix of hardware) led to margin contraction. But we believe that a mix shift toward software and services sales could support stronger margins at Lexmark.

Earnings Whispers?

Our proven model does not conclusively show that Lexmark will beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP (Read: Zacks Earnings ESP: A Better Method) and a Zacks Rank #1, #2 or #3 for this to happen. That is not the case here, as you will see below.

Zacks ESP: The Most Accurate estimate stands at $0.96 while the Zacks Consensus Estimate is lower at $0.91. That is a difference of +5.5%.

Zacks Rank #4 (Sell): Lexmark’s Zacks Rank #4 (Sell) lowers the predictive power of ESP and even when combined with a positive ESP, makes surprise prediction difficult. We caution against stocks with Zacks Ranks #4 and #5 (Sell rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Other Stocks to Consider

Here are some other companies you may want to consider as our model shows they have the right combination of elements to post an earnings beat this quarter:

Yahoo Inc. , Earnings ESP of +14.8% and Zacks Rank #1 (Strong Buy).

Interdigital Inc. (IDCC - Free Report) , Earnings ESP of +350.0% and Zacks Rank #2 (Buy).

Broadcom Corp. has a Zacks Rank #2 (Buy) with an ESP of +1.9%.

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