Novice Investing - Lexmark Out of Toner?

Date: Monday 01st 2008f December 2008 04:51:35 PM

Lexmark Out of Toner? - 10/06/2005

By: Novice Investing Staff

Lexmark International showed up on our radar screen when it plunged to around $ 44 on Tuesday 10/04/05. This brings it with a trailing P/E of 11. Of course, what matters to a common stock is future earnings, but it is a gauge, nevertheless.

Printer is what Lexmark Does. Products include: monochrome and color laser printers, inkjet and dot matrix printers. We won't go into details here but printer business is a cash machine. Hewlett-Packard Co. (HPQ) lost money on its PC business but its printer business generate enough cash flow to offset the unprofitable PC business. The moral of the story is printers equate cash flow.

At a glance, Lexmark appears to have a relatively healthy balance sheet. As of June 2005, Lexmark has a net cash of 957 Million or $ 8.06 per share. EPS estimate by analysts for fiscal year 2005 is : $ 4.08 per share. This of course is still unadjusted to Lexmark's recent earning warning. Let's say Lexmark can only earn $ 3.50 per share in 2005. At recent price of $ 44, the real price of Lexmark business is $ 36. With $ 3.50 EPS, Lexmark is trading at 10.3 times of reduced earnings.

At this price level, Lexmark is definitely worth watching for. If it can earn $ 3.50 over the next few years, we believe fair value of Lexmark is when its Price Earning ratio equal to 14. At this P/E ratio, Lexmark is yielding 7%. Therefore, for P/E ratio of 14 and Earning per share of $ 3.50, Lexmark real business is fairly valued at $ 49 per share. Add in the positive net cash from Lexmark's balance sheet, Lexmark stock is fairly valued at $ 57 per share.

$ 57 per share represents 22% price appreciation from recent price of $ 44. While the risk reward ratio is not that good (considering that LXK may earn less than $ 3.50 per share), it is definitely worth watching for. If Lexmark stock price run lower, we'll be more inclined to look at it as possible investments. That time, however, has not come.

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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 International (LXK) or other securities.

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