Lexmark International's Strategic Initiatives Show Potential - Analyst Blog

On Dec 11, 2014, we issued an updated research report on Lexmark International Inc. (LXK) following the company's better-than-expected third-quarter 2014 results.

We are optimistic about the company after it posted third-quarter non-GAAP earnings per share of $1.05, which comfortably surpassed the Zacks Consensus Estimate of 93 cents as well as its own guidance range of 85–95 cents. Also, earnings per share increased 2.9% from the year-ago quarter due to higher revenues and a lower tax rate.

Lexmark reported third-quarter non-GAAP revenues (excluding acquisition and divestiture-related adjustments) of $921.1 million, which not only increased 2.9% from the year-ago quarter but also beat the Zacks Consensus Estimate of $888.0 million. The year-over-year increase was primarily driven by strong growth in Laser and Perceptive Software business and the ReadSoft acquisition.

Nevertheless, guidance for the fourth quarter was tepid, reflecting the Inkjet exit, shift to high-margin solutions business and macro uncertainty. However, the company provided an encouraging fiscal 2014 earnings guidance. Though synergies from acquisitions and renewed focus on the software space could set it back on the growth path, their impact on results could take some time to materialize.

Nonetheless, the Inkjet exit is a positive, in our view. This top vendor of digital printing hardware, software and consumables will now be able to focus more on Managed Print Services (MPS) and the software business where growth prospects are better. Moreover, Lexmark is doing really well in the MPS market and is winning deals continuously.

Lexmark's recent acquisition of ReadSoft also bodes well as it will strengthen its position in the European business process management market. We believe that ReadSoft provides Lexmark the perfect footing to expand its business process solutions unit. It is expected to positively impact Lexmark's Perceptive Software segment generating $500 million revenues in 2016.

We see good growth prospects for the company in the software sector, although the company is trying to expand its hardware solutions business. However, the overall macro uncertainty could have an effect on product demand. Lexmark has a strong market position but reduced demand for traditional printing hardware has impacted pricing in the computer peripherals market.

Though constant pricing pressure from competitors such as Xerox Corp. (XRX) and RICOH CO LTD and a high debt burden remain the concerns, we expect Lexmark to turn the tables with an increased focus on software and services.

Currently, Lexmark has a Zacks Rank #3 (Hold).

Stocks to Consider

Some better-ranked stocks in the office automation & equipment industry include Canon Inc. (CAJ) and Pitney Bowes Inc. (PBI), both carrying a Zacks Rank #2 (Buy).