Is Lexmark A Dell Target Or A Potential Casualty?

Wow, very interesting dynamic going on the last two days as the Street tries to figure out the future direction of the relationship between Lexmark (LXK) and Dell (DELL). Wednesday, Lexmark shares jumped on what at least one report claimed was speculation that Dell might buy the printer maker.

But that might not be the right explanation. UBS analyst Ben Reitzes notes Thursday morning that in a talk Wednesday at a Gartner conference in Orlando, Michael Dell raised the possibility that Dell might sell printers and supplies through retailers (right now, you can only buy Dell-branded printers online).

As Reitzes notes, Lexmark makes all Dell-branded inkjet printers, and 50% of its laser printers. So more printer revenue for Dell has obvious implications for Lexmark (he notes, for instance, that Dell accounts for 15%-20% of Lexmark’s current laser unit volume).

On the other hand, he notes that sales of Dell printers have slowed, and cautions that there is risk that Dell could diversify and work with other manufacturers, and says he believes “Dell could be going in another direction with inkjets,” and that he is “increasingly worried about the future of the Dell laser business.”

Reitzes repeated his Sell rating on Lexmark Thursday morning, and maintains his $36 price target.

Meanwhile, in an earnings preview note Thursday morning, Goldman Sachs analyst Laura Conigliaro says that “short of acquisition-related speculation,” Lexmark remains a Sell. she cut her fourth quarter EPS estimate to 50 cents from 60 cents, and trimmed 2008 to $2.60, from $3. She says Lexmark is afflicted by “secular deterioration” in its inkjet business fundamentals and increasing competition.

Lexmark, which jumped $2.74 Wednesday, Thursday has retreated $1.37, to $42.43.

LXK vs. DELL 1-yr chart: