Novice Investing - Ink Still Dry at Lexmark

Date: Thursday 07th 2008f August 2008 01:44:58 PM

Ink Still Dry at Lexmark - 10/25/2005

By: Novice Investing Staff

Lexmark International Inc. (LXK) reported earning this morning and the result isn't good. It earned 59 cents a share for 3Q 2005 versus $ 1.02 per share a year ago. Guidance is weak as well. It now expects to earn $ 0.45 for the fourth quarter of 2005. For all of 2005, it is now expected to earn $ 3.19 per share, down from $ 3.50 expected back over a month ago.

The stock price clearly reflected that. It is down 6.5% as it traded at $ 39.60 now. Having said that, let's look at Lexmark's future because that is what really matters. For 2006, analysts now estimate Lexmark to earn $ 3.28 per share now, down from $ 4.79 estimated EPS just 90 days ago. Our job now is to figure out how much Lexmark eventually can make for fiscal year 2006.

With $ 8.06 positive net cash per share, Lexmark is in no danger of being out at all. It is still expected to earn money for next year too. Now, we believe that the fair value of a stock is when its P/E is around 14. Armed with this information, we can do a reverse estimate on what most people expect Lexmark to earn in the coming year.

At current stock price of $ 39.50, the real price for owning Lexmark's business is $ 31.50. With a P/E multiple of 14, this means that the market is expecting Lexmark to earn $ 2.25. This is way off the $ 3.28 per share mean estimate for fiscal year 2006.

Therefore, obviously, the market is expecting Lexmark to cut its earning estimate further in the future. We believe that Lexmark will do just that and therefore we are not quite a buyer of Lexmark for our portfolio. Our gut feeling is that Lexmark will eventually cut estimate to $2.75- $ 3.00 range for 2006. At that time, we will update you again whether Lexmark has fallen enough to justify a purchase.

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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