Novice Investing - Bleeding Ink at Lexmark

Date: Tuesday 13th 2008f May 2008 07:19:28 AM

Bleeding Ink at Lexmark - 07/09/2007

By: Novice Investing Staff

Printer maker Lexmark International Inc. (LXK) preannounce revenue that is 2% below a year ago level. This suggests revenue of $ 1.20 Billion. As a result, earning for the 2nd quarter will fall to $ 0.64 - 0.69 per share. This compares with $ 0.82 expectation. Management cited lower hardware average revenue to drive up cost. Also, there are talks about new competition from Eastman Kodak (EK) which affects second tier printer company such as Lexmark.

Early last week, we predict Lexmark to increase revenue by 5% in 2007 and afterwards. Considering this new development, we believe that Lexmark will not achieve any turnaround during 2007 and start looking towards 2008 instead. For 2007, we predicted revenue of $ 5.36 Billion with Earning per share (EPS) of $ 4.69. Consequently, we now predict revenue of flat $ 5.108 Billion in 2008 which will result in EPS of $ 4.21 for 2008. We assumed that by 2008 gross profit margin would have stabilized and therefore all other calculations remain the same as our previous EPS calculation for Lexmark.

With this latest setback, we believe Lexmark will announce another round of job cut which would decrease SG& A by $ 20 Million from our previous estimate. Therefore, SG & A will come in at $ 740 Million. With R&D and income tax expense remains the same, we can now calculate the fair value of Lexmark's stocks now.

Fair Value: (EPS X P/E) + positive net cash
Fair Value: $ 4.21 x 14 + $ 3.16 = $ 62.10 per share.

Lexmark stocks has tumbled to around $ 44 per share, which represents 41% potential appreciation from fair value. We generally invest in companies that can generate us a 50% potential appreciation. However, Lexmark has actually become cheap enough despite the drop in earnings. Therefore, we decide to add Lexmark to our sample portfolio holdings at a price tag of $ 44.00. With its rich cash balance and low price/cash flow ratio, it might be snapped up by private equity in the future.

END

Have questions or want to comment on this article? Proceed here

Distributing your own investing content is easy. Simply, click here.


Pro Forma Income Statement for LEXK	Fiscal year 2008 (Revised)
Revenue	$ 5,108 M
Cost of Goods Sold	$ 3,420 M
Gross Profit	$ 1,688 M
SG & A	$ 740 M
R& D expense	$ 408 M
Interest Expense	$ 0 M
Profit Before Tax	$ 540 M
Income Tax Expense	$ 140 M
Net Income	$ 400 M
Shares Outstanding	95 M Shares
EPS Estimate	$ 4.21

Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Lexmark Inc. (LXK) or any other securities.

[Resources] [Forum] [Link Partner ] [Novice Investing Directory ] [ Submit Your Article Here ]