Lexmark Is Worth $38

Quick Take

• Demand for worldwide printer hardware continues to remain tepid, and market incumbents continue to push smaller players out of the industry.


• Lexmark is focusing on high margin laser printer hardware, managed print services (MPS) and process management software services to buck the trend in printer industry.


• Revenues from MPS and Perceptive will increase to 30% of total revenue by 2014.
  
  
  
  • MPS will drive revenue growth at printer and supplies division due to the demand from companies that look to outsource their printing needs.
  
  
  • Organic and inorganic growth to deliver revenues growth at Perceptive software, which is expected to grow 10% annually.
  
  
  
  

Lexmark International (LXK) is primarily engaged in sales of printer and supplies, which makes up nearly 90% of its revenues. However, the company is aggressively building its software business to diversify from the flagging printer industry, where competition from bigger players such as HP and Canon limit the growth for smaller companies.

Recent trends in the worldwide hardcopy peripherals market indicate that the demand for printer hardware is tepid. Lexmark has also exited the low margin inkjet printer market, and its share in the industry is on a decline. In a bid to transform its business, Lexmark is focusing on high margin process management software services, laser printer hardware and Managed Print Services (MPS). The company acquired a host of companies this year that will be integrated with Perceptive Software to bolster its business process management offering. In this article, we will review factors that justify our $37.60 valuation of Lexmark.

Focus On MPS To Drive Growth

According to IDC, the worldwide hardcopy peripherals market grew by 2.6% in Q3 2013, the first time since Q1 2011. [1] The past trend indicates that demand for inkjet printer remains tepid, and most of the growth in printer industry can be attributed to the demand for laser printers. While the laser printer shipments grew by 5.9% year over year, inkjet printers grew by 0.5% in Q3 2013.

In the recent quarters, Lexmark’s unit sales of printer hardware and supplies have declined in line with the decline in printer hardware industry. However, Lexmark has been restructuring its business in light of the emerging trends in the printer hardware industry. Lexmark exited from its low margin inkjet printer business and increased its focus on the higher margin laser printers. Additionally, the company is offering managed print services, under which the procurement, maintenance and other aspects of printing are taken over by Lexmark.

As a result of this shift in business, Lexmark’s MPS contracts have increased. This has positively impacted its printer supplies business. We believe that MPS integrated with Perceptive’s solutions will deliver value to Lexmark’s growing client base. We expect MPS to become the biggest driver of revenue in ISS division going forward. Currently, we forecast Lexmark’s market share to decline from 3.6% in 2013 to 2.4% by the end of our forecast period. If Lexmark’s market share were to remain at 3.6%, our stock price estimate can increase by 10%. However, if it were to decline to 2%, our price estimate can decline by 10%.

Acquisition To Drive Growth At Perceptive Software

The Perceptive software division is the second biggest business unit and makes up nearly 9% of Lexmark’s estimated value. As Lexmark plans to become an end-to-end solution provider, Perceptive Software is becoming an increasingly important division for the company. This division is well placed to offset the slowdown in the printer and peripherals market. Perceptive experienced annual growth of 62% in the enterprise content management (ECM) and business process management (BPM) business in 2012, and reported $162 million in revenues for FY12.

Lexmark has guided 15% growth in Perceptive’s revenue for FY13. The company aims to achieve this growth through acquistions. The company has completed four acquisitions this year (PACSGEAR, Saperion, Twistage and AccessViaj), and these will be integrated into Perceptive Software, which will help drive its software business. [2] We also expect the seamless integration of Perceptive’s array of solutions with MPS to bolster revenue for the company. Therefore, we expect Preceptive’s revenues to increase from $162 million in 2012 to over $500 million by the end of our forecast period. However, the revenues from this division can be significantly higher in the future, due to organic and inorganic growth that can help the company to capture a bigger chunk of $12 billion ECM-BPM industry. If Preceptive’s revenues were to increase to $700, our stock price can potentially increase by 5%.

You can drag the trend lines in the interactive charts above to see how various scenarios for laser printer market share, cartridges per laser printer and Perceptive software revenues affect Lexmark’s stock value.

We currently have a $37.60 Trefis price estimate for Lexmark, which is 10% above its current market price.

Notes:

1. Worldwide Hardcopy Peripherals Market Returned to Year-Over-Year Growth in the Third Quarter of 2013, December 3 2013, www.idc.com


2. See Lexmark Strengthens Perceptive’s Portfolio with PACSGEAR Acquisition, Lexmark Acquires Saperion To Bolster Its Perceptive Business and Lexmark Acquires Two Companies To Support Growth In Cloud And Retail Solutions

Disclosure: No positions

Source: Lexmark Is Worth $38

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