Novice Investing - Earning Per Share Calculation for Lexmark Inc.

Date: Thursday 07th 2008f August 2008 01:45:06 PM

EPS Estimation for LXK

Time to get up and dig some data. This is the heart of our analysis. All we try to do is to predict the company's profit for the coming fiscal year. We spent most of the analysis predicting revenue because without it, there will be no profit! Therefore, predicting revenue is essential for other components of the income statement. We start from revenue estimation, followed with gross profit, SG&A, interest expense and closed with shares outstanding estimation.

Revenue Estimation

Revenue peaked in 2004 at $ 5.318 Billion and had been drifting lower since. In fiscal year 2006, revenue clocked in at $ 5. 108 Billion. In its annual report, Lexmark believes that home printing output opportunity is a $ 90 Billion industry in 2006. This includes the market for fax, copiers and printers which are increasingly integrated into a single multifunctional devices. Being a smaller company than its two rivals (Hewlett Packard, Xerox and Cannon), Lexmark is poised to grab market share. Lexmark's strength lies in developing and selling printing solutions that are multifunctional. It plans to increase Research & Development expense to drive new product innovation which will drives recurring supplies sales. The printing industry is expected to grow mid single digits in the coming years. We believe Lexmark can at least achieve that target and therefore, we predict Lexmark's revenue to rise 5% from 2006 level. Revenue for 2007 is $ 5.363 Billion with 5% growth afterwards.

Gross Profit Estimation

During 2006, Lexmark initiated a supplier managed inventory (SMI) with its primary suppliers to drive down cost of supply chain. With this initiative, Lexmark is expected to have higher gross profit. For the past three fiscal years, Lexmark's gross profit is consistently at 33.7%, 31.3% and 32.2% respectively. For 2007, we expect Lexmark to slightly improve their gross profit margin to 33%.

SG&A Estimation

Selling General & Administrative Expense came in at $ 761.8 Million. The company expects 100 positions to be eliminated in fiscal year 2007. With 14,900 employees, human resource continues to be the main expense of SG& A. We expect SG&A to register a slight decrease to $ 760 Million. Meanwhile, the company continues to invest in Research & Development. These costs had increased each year and we expect another increase to $ 408 Million, up 10% from $ 370.5 Million previous year.

Interest & Income tax expense

Lexmark has more cash equivalents & long term investment than it has long term debt. Therefore, we predict interest expense to be $ 0. Meanwhile, tax rate for fiscal year 2004, 2005 and 2006 was 26 %, 35% and 24 % respectively. For fiscal year 2007 and beyond we will use 26% tax rate.

Shares Outstanding Estimation

Shares outstanding for Lexmark Inc. is 95 Million recently. We will assume flat shares count (due to shares buy back)

Pro Forma Income Statement for LEXK	Fiscal year 2007
Revenue	$ 5,363 M
Cost of Goods Sold	$ 3,593 M
Gross Profit	$ 1,770 M
SG & A	$ 760 M
R& D expense	$ 408 M
Interest Expense	$ 0 M
Profit Before Tax	$ 602 M
Income Tax Expense	$ 156 M
Net Income	$ 446 M
Shares Outstanding	95 M Shares
EPS Estimate	$ 4.69

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