Lexmark International: Sells Less, Makes More

Printer manufacturer Lexmark International (LXK) said first-quarter quarter profit rose, beating expectations, helped by a 42 percent drop in inkjet printer sales.

You read that right. Since printer makers typically lose money on printers (hoping to make up for it in future sales of ink or toner) the fewer printers they sell in a given quarter, the more money they make.

Of course, if the model is working the lower sales today would translate into lower future profits, as the unsold printers will not require ink refills. Part of Lexmark’s current problem appears to be a decision by Best Buy (BBY) to at least temporarily eliminate Lexmark printers from their stores.

Lexmark still has lots of cash on the balance sheet and is now trading at a 12.3% free cash flow yield, which offers room for a decent return even if the company’s earnings decline over time. It remains, in my opinion, worth a look for value investors. However, it offers a bumpy ride - and I’d like to see it hold the 50 day moving average as evidence against the stock being a value trap.

Disclosure: At time of publication, William Trent has no position in the companies mentioned in this article.