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Shares of PC printer maker Lexmark International (LXK) were up about 4% this morning, after they knocked the socks off earnings estimates (see full conference call transcript here). My prediction that they will be acquired hasn't borne out yet, but we're making money along the way, up 31% versus the 14% rise in the S&P 500.

Readers own this stock because it would make a fabulous acquisition for larger cap tech firms, whose cash is earning nothing in money market accounts. From February 8th:

In an increasingly commodity-like business, Lexmark is shifting its revenue mix upstream, to target small and medium sized businesses. Instead of being the Canon (CAJ) and Xerox (XRX) giants with higher price points and looking nervously below you, Lexmark is attacking from the low end, driving market share increases with competitive pricing and excellent customer satisfaction. In some ways, their attack on the small business segment is like people trading down to store brands in the supermarket - cheaper product, but nearly equal quality.

As for a potential deal, it is a BARGAIN for an acquirer. Below are my estimates for 2010 and 2011. In a buyout scenario, I pull out a bit from operating expenditures, but not nearly as much as could be extracted. I am conservative on my Free Cash Flow estimates, pulling out working capital boosts from operating cash flow. I'm also likely conservative on my hefty estimates for "other expenses." These shares are a great deal with or without a buyout. I purchased shares earlier today, and I suggest you buy some tomorrow morning.
Today's earnings beat came largely on the heels of gross margin, which came in at 36.9%, a full 1.6% above last year. Like other firms, tight inventory planning allowed for nice margins once sales returned:

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Lexmark is taking up guidance for next quarter by about 20 cents. I've boosted full-year estimates to about $3.85 per share in earnings, and that will prove conservative, partly based on the (above) continued low inventory planning. The stock nearly DOUBLES from here if they hit that earnings figure and trade at a trailing P/E of 16, plus cash per share (yes, discounted for repatriating it from abroad). On a Free Cash Flow Yield (FCFY%) basis, they're in the mid-teens. I'm still happy to continue to own shares of the standalone company, but I think there's a better chance that they get snapped up by someone larger.


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Disclosure: Author long LXK

Source: Lexmark Up 3% on Earnings ... But No Buyouts Yet