Bernstein Grants Lexmark Its Sole "Buy" Rating

Lexmark (LXK) shares Thursday got a lift from an upgrade Thursday morning by Bernstein Research analyst Toni Sacconaghi, who raised his rating on the stock to Outperform from Market Perform, while maintaining a $51 price target.

A bold call: As Sacconaghi notes, Lexmark is one of only 13 companies in the S&P 500 without a single buy recommendation (or it was, until Thursday).

In his report, Sacconaghi cites several reasons for his upgrade of the printer company’s shares:

Printing industry remains healthy; he says the company can restore operating margins to 10%-plus going forward.

Stock is cheap, trading “well below the sum of its parts.”

Q3 expectations “appear very low.” He sees EPS of 30 cents, which is way above the consensus of 13 cents.

“Investors are likely to pay for signs of progress (inkjet unit growth and/or margin improvement),” he says, adding that “the stock could turn suddenly, given prevailing negative analyst sentiment and the large outstanding short position.”

Sacconaghi sees two potential outcomes for the company’s struggling inkjet business: new products boost unit growth and lift supplies revenue, or the new products fail to catch on and the company retrenches, or even exits the inkjet sector. Either alternative is eventually margin accretive, he says.

Sacconaghi writes that an analysis of profitability at Hewlett-Packard (HPQ), Canon (CAJ) and Epson shows that operating margins have been flat to up over the last five years, suggesting Lexmark’s issues have been operational and company specific. He also notes that gross margins at Lexmark have held up, but that operating expenses have ballooned to an all-time high. Get expenses under control, and the company can boost margins.

LXK 1-yr chart:

Comments

[Ed Crowley]

While I respect Toni as an analyst, I have to ask what he is basing this on. An analysis of industry operating profit actually shows an overall decline (see the Photizo Group's Operating Income Index) despite good performance by selected players (HP, Canon, and Ricoh to name a few).

Lexmark's consumer business is broken. They have established a week brand position as the 'cheap' printer which is sold into a segment of the market which doesn't print enough pages to recoup the hardware loss. They supposedly left the 'low price segment', although they now have products selling for as low as $29 in Walmart (see the Photizo Group's retail advertising report). It's hard to imagine prices much lower than that.

True, the firms laser business is very healthy, but until the company faces the albatross around it's neck (ink jets), prospects are dim and a $35 valuation may turn out to be high!