Forbes Magazine reports that Lexmark International is clinging to its last lifeline.
On Monday, the beleaguered printer manufacturer dramatically slashed its forecast for the second quarter amid weak sales and increased competition.
The company now expects to earn 62 to 67 cents per share in the second quarter, including a 5 cent tax-related benefit but excluding restructuring-related benefits. That range is at least 20 cents below the previous forecast range of 82 to 92 cents and far below the Street’s call of 86 cents a share.
The fact that the inkjet industry is under pressure is nothing new, but the size of Lexmark’s miss is certainly eyebrow raising. Further, a Lexmark recovery seems improbable in the near term. For the third quarter, the company now expects to make somewhere between 0 cents and 10 cents, versus the Street’s previous estimate of 81 cents. And, as the Lexmark ship sinks, don’t expect some private equity firm or rival to come galloping in with a takeover bid. Its tattered cash balance sheet, compounded by the general tightness in the private equity market, makes Lexmark unlikely buyout target.
How did Lexmark fall? Well, the firm hasn’t been doing well for awhile. It has lost 36% of its value since January, when it was trading around $73 a share. But even that recent peak is far off its all-time peak of $123 back in May 2000 at the height of the tech bubble. Now at $46 a share, Lexmark is far closer to its post-crash level, when it was floating around $30 a share at the end of 2000.
Today, however, Lexmark’s woes have nothing to do with a tech bust. Simply, customers are not buying Lexmark products.
Shares of Lexmark were down 6.4%, or $3.15, to $46.35 in Monday trading.
Many consumers are opting for similar products by its longtime rival Hewlett Packard or after-market suppliers. In order to compete with HP and third-party suppliers, who can offer bargain-basement deals, Lexmark has chipped away at its prices, hurting already thin profit margins. In addition, “higher than expected product costs” and a greater demand for the company’s lower-priced products weighed on second-quarter earnings, according to UBS analyst Ben Reitzes in a Monday research note.
He lowered his second-quarter estimate to 65 cents from 89 cents and dropped his fiscal year forecast to $1.98 from $3.52. According to Reitzes, a major drag in the second quarter was related to Dell, the computer and printer retailer. Since 2002, Lexmark has made printer and supplied parts for Dell. Dell’s underperformance, particularly in the inkjet printer business, has, by extension, battered Lexmark. While sales of Lexmark’s own-brand inkjet units actually increased 30%, that gain was almost completely negated by a decline in its sales to Dell.
“We continue to believe that supplies and original-equipment manufacturer sales trends will continue to be weak and even get worse throughout the year, applying more pressure to earnings. We continue to believe Dell is likely re-evaluating its printer strategy and would not be surprised if the company announced it was changing course in printing, especially inkjets,” Reitzes said. He predicted that Dell may completely exit the inkjet business by next year.
Lexmark’s woes seem to be very much Lexmark-centric. According to Reitzes, HP could be hurt by industry demand trends, but it is “better positioned long-term given its leading technology, robust product portfolio providing better mix, and strong channel relationships.”
Lexmark will have a tough time playing catch-up. Given its dwindling revenues, there will be less capital available for research and development. In the mean time, it can tighten its cost structure and try to run the business more efficiently. However, if the customer simply isn’t there, no financial tweaking can resuscitate Lexmark.
