Novice Investing - A Refill for Lexmark

Date: Tuesday 13th 2008f May 2008 07:22:02 AM

A Refill for Lexmark - 06/26/2007

By: Hari Wibowo

Lexmark International Inc. (LXK) fell to 52 week low at $ 49.50 per share last week, down 33% from its 52 week high. We last talked about Lexmark back in October 2005. At the time, the shares had fallen to $ 40 before eventually rebounding to $ 74 per share. We were expecting earning to go lower to $ 3.00 per share. It turned out that earning for the fiscal year 2005 and 2006 were $ 3.77 and $ 3.58 per share respectively. With $ 8 per share of positive net cash at the time, you can easily understand why Lexmark can rise almost 100% from its low back in October 2005.

Is it our second chance to own Lexmark? The company had been solidly profitable for the last two years and it is expected to record a profit for fiscal year 2007 for roughly the same amount; $ 3.56 per share. With positive net cash now amounting to $ 4.42 per share, Lexmark is trading at 12.6 times earning estimate, hardly a compelling buy, but worth watching nevertheless. If supposed you feel that Lexmark can grow earnings by say 10-15% per year, EPS by year 5 would be $ 7.16 per share. This EPS is worth $ 5.83 per share in present value. Based on 15% earning growth, Lexmark is valued at roughly 7.7 times earnings, which offers us with potential double.

Should Lexmark fell 10% or more, you could seriously look at its business. We believe that the printer business is not a zero growth business. The printer business should be able to give Lexmark 10-15% earning growth which if achievable gives Lexmark an excellent return on investment within five years.

What we also like about Lexmark is its simplicity of its financial statement. It has 846.8 Million of property plant & equipment with no goodwill and it is depreciating 200 Million worth of assets each year. Every four years, Lexmark would depreciate all its assets fully. Suppose Lexmark stretches its depreciation expense to five years, it would bring an additional $ 40 Million profit or 42 cents per share to the company. Also, it increases its R&D budget each year since 2005. If Lexmark management decide to 'play'

around with the number by keeping R&D expense constant, Lexmark earning would have increase by $ 60 Million or 63 cents per share annually. Combined, Lexmark's conservative financial reporting had reduced earning by $ 1.05 per share which depressed the share. Thus, Lexmark can achieve $ 4.50 earning per share if it wants to but it doesn't. Sounds good to me. Let's keep an eye on this.

Looking at our sample portfolio stocks, we notice that there is only $ 1300 spare money to invest around. We prefer to invest in $ 2000 lot at a minimum. Therefore, we should wait and watch for our other portfolio stocks to be sold before we can dip our toe into this one.

END

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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 Inc. (LXK) or any other securities.

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