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Lexmark (NYSE:LXK) manufactures and sells laser cartridges primarily to business customers in North America and Europe. Laser cartridge sales are an important source of growth for printer makers such as Lexmark, HP (NYSE:HPQ), Samsung (OTC:SSNLF), Canon (NYSE:CAJ) and Epson. We expect Lexmark’s laser cartridge pricing to continue to decline over time due to greater competition.

Importance of Laser Cartridge Business

We estimate that Lexmark’s laser business (printers and cartridges) constitutes 78% of the $34 Trefis price estimate for Lexmark’s stock. The cartridge business in particular is important for two main reasons:

1. Printer Hardware Itself is Low Margin or Loss Making

Many printer makers sell printer hardware at a small profit or sometimes even at loss in order to increase their penetration among business customers.

2. Laser Cartridges Have High Profit Margins

Low margin printer hardware helps to lock-in cartridge customers. This makes it easier for printer makers to make higher profits by selling more expensive proprietary printer cartridges to customers.

Laser Cartridge Pricing Expected to Decline

Printer buyers are increasingly aware of the long-term costs associated with printer cartridges and adjust their printer purchase decisions accordingly. This is leading to a price war among cartridge manufacturers in order to drive the unit sales. As a result, Lexmark’s average laser cartridge price has fallen approximately 18% from $235 in 2005 to $192 in 2009.

Going forward we expect Lexmark’s laser cartridges prices to decline rapidly and reach $147 by the end of Trefis' forecast period. This decline is attributable to the following factors:

1. Lexmark will try to pricing aggressively to compete with market leaders, such as HP and Canon, given the large cushion of margins in the cartridge business

2. Cheaper cartridges from third-party manufacturers will partly contribute to the decline in prices

3. Decline in manufacturing costs every year will facilitate competitive price reductions

You can modify our forecast above to see how Lexmark’s stock could be impacted if the decline in cartridge prices were greater than we forecast.

For additional analysis and forecasts, here is our complete model for Lexmark’s stock.

Author's disclosure: None.

Source: Lexmark Hit by Declining Laser Cartridge Prices