10-Minute Investment Autopsy No. 19: Lexmark (LXK)
The stock was the cheapest it had ever been. It still had 44% further to fall.
If you haven’t read the guide to the 10-Minute Investment Autopsy series, you can find it here.
The Original Thesis
Who: Ricky Sandler
When: August 2006
What: Lexmark (ticker: LXK) as a short
The Thesis:
The printer business used to be great, but it’s not anymore.
Epson, Canon, Samsung, Xerox and other competitors have expanded in the business.
While this is still technically a razor/razor-blade business, competitive intensity has caused the upfront loss on the printer to increase to -20% to -40% gross margins.
The printer replacement cycle has shortened to 2 years, decreasing the value of the consumables profit stream over the lifetime of a customer.
Growth in private-label refilled ink cartridges is also a negative for the industry.
Lexmark’s reliance on Dell as their largest, albeit white-label, customer is a problem as Lexmark gets beat up on price and earns poor economics on the relationship.
Due to underinvestment in R&D, the company is poorly positioned for color and photo printing, where the industry is moving.
The stock trades at about 14x this year’s earnings and 16x next year’s, which is a premium to many growing businesses at a time when its business is disintegrating.
These are the highlights of Lexmark’s then-recent financials up to the point when Ricky was presenting his thesis:
This is the stock chart up to the time when Ricky presented his thesis:
Pause here. Think through the thesis and the facts and decide what you agree with, what you disagree with and whether you would invest based on the information available.
What Happened (Just the Facts)
Over the 5 years following Ricky’s 2006 interview, Lexmark’s stock was down 45% vs. +1% for the market
There is a lot more to the case:
The Autopsy - the reasons for what happened
The Lessons that you can apply to your own investing
Discussion Questions for you to think about and discuss with other thoughtful investors in the weekly case thread