Whither Lexmark?

When Lexmark pre-announced a truly horrific quarter the first week of October—on a $100 million revenue miss (out of $1.2 billion in revenue) the company guided operating income down by, well, $100 million. In other words, every dollar of lost sales cost the company a dollar in operating income.

And it would have been worse if the company hadn’t gotten a $35 million pre-tax benefit from some inventory shuffling within its supply chain that was not disclosed until the 10Q came out November 1.

I can’t recall a company—at least since the dot-com days—that reduced net income guidance by more than its revenue shortfall.

At an analyst meeting on November 15, Lexmark management was long on buzzwords (“distributed output market” “vertical integration” “cost and price performance”) and short on specifics, although, to be fair, the company had warned ahead of time that it was not going to “address business conditions” at the meeting.

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Which was probably wise, because “business conditions” for Lexmark aren’t too perky.

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A look at Amazon’s Top Sellers in the inkjet printer category brings up no Lexmark product in the Top 10 or even the Top 50 sellers. The first Lexmark appears at number 58, behind pretty much every other brand in the business.

As for the brick and mortar side of retailing, Lexmark’s performance during the crucial holiday season won’t be known for a few more weeks—but Target was selling a Lexmark model for all of $17 on Black Friday.

Hardly the mark of a hot product.

Why then has Lexmark’s stock price risen 15% from its get-me-out-before-I-have-to-show-this-pig-on-my-sheet-at-the-end-of-the-month late October low?

Because talk of a leveraged buyout has been making the rounds.

On November 10, Sanford Bernstein analyst Toni Sacconaghi (who, for the record, was recommending Lexmark strongly prior to the blow-up) raised the notion that an LBO of Lexmark “appears economically viable,” citing the company’s “strong cash generation” and the potential for a divestiture of the money-losing inkjet business in order to “milk the supplies annuity on its existing installed base [of printers].”

At yesterday’s close of $47.62, Lexmark shares are approaching the price Sacconaghi had derived when he expressed his opinion that an LBO buyer might pay a 20% premium to the $42 stock price, despite a total absence of decent news regarding Lexmark, the printer business, or consumer electronics outside of iPods and plasma television sets.

Clearly somebody in the this-cash-is-burning-a-hole-in-our-pockets world of private equity is doing some serious homework on Lexmark. Anybody with an informed opinion on what the answers might be would be welcome.

Jeff Matthews I Am Not Making This Up © 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.