Thursday, June 11, 2009

Lexmark - Target or Toast?

Thanks to the Tech Bubble, shares of printer maker Lexmark hit $135 in the year 2000. With around 130 million shares outstanding, the market cap was then over $17 billion. With net income of $300 million (+ or -), Mr. Market was paying 56 times earnings for a company playing in HP's sandbox. Times change.

LXK shares fell into the low 30's by late 2007. Thanks to share repurchases, shares outstanding fell below 100 million. This combined to drag Lexmark's market cap below $4 billion. Earnings? Still around $300 million.

It was around this time that rumors circulated that Dell would acquire Lexmark. It never happened. Today, the humbling of Lexmark continues.

Lexmark trades at $16.50 a share.
Shares outstanding = 77.7 million shares.
Market capitalization = $1.3 billion.

With nearly $1 billion in cash, Lexmark warrants a look. True, it has $650 million in debt and a hefty pension liability of around $300 million. That said, Lexmark generates free cash flow and is still a relentless buyer of its own shares. Estimates put earnings for 2009 at $185 million and free cash flow at over $2 a share.

Both numbers could prove high, but Lexmark still benefits from a substantial sales relationship with Dell, which has $9 or $10 billion of cash burning a hole in its pocket according to today's headline:

With HPQ trying to look like IBM with the EDS purchase and DELL trying to catch up to HP, is it a stretch to think these guys will try to take on Hewlett in its "happy place"? They better get serious about it OR HP's Hurd will use printer cash to pummel his competitors for years to come.

The players in the printer space are pretty well-defined. And I think LXK could be in play. Its cash alone screams "BUY ME". Did I mention it's market cap is $1.3 billion? Dig into the mattress Mr. Dell! Or just check the cushions of you La-Z-Boy. But do it.

If the fcf estimate is right, LXK is trading at 8x fcf before adjusting for the cash horde. Either way, it's worth a look.

Third Avenue owns some, but it seems to be off most radar screens. This is a small attempt to put it back on.

An alternative? Xerox (XRX). It's cheap too. Every value shop owns it!

I own 'em both!

1 comment:

  1. HP wireless HP printer is giving me a lot of trouble in the installation process; maybe, it's a sign of things to come for HPQ.