Wednesday, October 27, 2010

Love Lexmark

I was going to post a long article about Lexmark (LXK) today.  A long dissertation on why the 20% drop in Lexmark shares is absurd given the news.  A $20 million revenue "miss" equals an $800 million loss of market value?

Or is it the retirement of long-time CEO Paul Curlander that spooked investors?  Did anyone realize that the new CEO has been with Lexmark since its founding?  Longer than Curlander?  The new guy even has the same first name!  It's Paul (Rooke).

My article was going to point out that LXK has $13.75 a share in cash and securities vs. a $38 stock price.  Perhaps it would have even mentioned the company has $6 a share in net cash.  Should I point out that the current market value (of just $3 billion), gives me all that cash plus a company that will earn over $4 in GAAP earnings this calendar year?  Cash earnings are even higher.

But I don't need to mention any of this.  

Analyst Ananda Baruah of Brean Murray, Carret beat me to it. Read about his note to investors HERE.  Baruah says that the recent sell-off was overblown.  He continues to rate Lexmark a BUY with a price target of $50 a share.

I don't often find myself in agreement with sell side analysts, but this is an exception.  My price target is exactly the same.  A pie in the sky?  That's what people told me last year.

My Lexmark position was built between May and July of 2009 for an average price of $15 a share.  Even after yesterday's plunge, the stock is still up 45% year-to-date. And up over 150% from my average cost. 

One thing that Ananda Baruah may not have covered is that Lexmark has reduced shares outstanding by 45% in the last 15 years.  At quarter-end, the company had $491 million of share repurchase authority outstanding.  They didn't buy any shares in the Q3, but I bet they will now! 

So you can listen to me (and Ananda Baruah) OR Mr. Market!

Today, my Lexmark position got a little larger.


Disclosure: Long LXK

9 comments:

  1. How about an update LVI? We miss your posts! Are you ready to show some love to UTMD again with their special dividend?

    Eagerly awaiting a new column!

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  2. hey if LXK is cheap, what about WDC? I think it has more "value" than LXK, what do you think?

    btw, love your blog, keep up the good work

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  3. Thanks, Sam. WDC is in a very different industry. Far more cyclical than LXK's industry. I don't do much with drive manufacturers. Outside my comfort zone.

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  4. well i am talking purely from a financial stand point. The two companies are also very similar that both are big tech specialties, and if you look the just the 10 years summary of both companies, are very similar that they held up very good in the past two years in terms sales and cash flow....

    http://moneycentral.msn.com/investor/invsub/results/statemnt.aspx?Symbol=WDC&lstStatement=10YearSummary&stmtView=Ann

    http://moneycentral.msn.com/investor/invsub/results/statemnt.aspx?Symbol=LXK&lstStatement=10YearSummary&stmtView=Ann

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  5. Sorry, I know they are both tech companies, but that is a big tent. Given the nature of the drive cycle, WDC may be cheap or not. LXK does not suffer from the same issues. They sell ink today, tomorrow, next week, next year.

    You have plenty of people who agree with you about WDC. And I'm not about to disagree with you. WDC is outside my circle of competence. And my circle of comfort.

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  6. thanx for the quick reply and your take on WDC, i would use the same argument that ppl and business need to buy bigger hard drives today, tomorrow, next week, next year, cuz they will need to be replaced sooner or later =) I just feel it's not as cyclical as the printer business. Anyway, keep up the good work and cant wait for your next post.....

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  7. Sam,

    Not to belabor the point, but there are huge structural differences in the drive business. I highly recommend Clay Christiansen's book (The Innovator's Dilemma). It does a good job of describing it.

    Printer companies are a bit more like Gillette. Break even on the printer and clean up on the ink.

    Thanks again for the kind words... work and a recent illness mean it will be a little while before my next post.

    It is humbling that anyone actually reads my writings so thanks.

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  8. thanx for the recommendation, i will certainly read that book for sure.

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  9. I've added Lexmark to my watchlist- even if not the deepest value situation, I still want to read about it (to see what you were looking at). I'll comment sometime down the road about my thoughts (I have quite a few companies I"m looking into right now...)

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