- Demand for worldwide printer hardware continues to remain
tepid, and market incumbents continue to push smaller players
out of the industry.
- Lexmark is focusing on high margin laser printer hardware,
managed print services (MPS) and process management software
services to buck the trend in printer industry.
- Revenues from MPS and Perceptive will increase to 30% of
total revenue by 2014.
- MPS will drive revenue growth at printer and supplies
division due to the demand from companies that look to
outsource their printing needs.
- Organic and inorganic growth to deliver revenues growth
at Perceptive software, which is expected to grow 10%
) is primarily engaged in sales of printer and supplies, which
makes up nearly 90% of its revenues. However, the company is
aggressively building its software business to diversify from the
flagging printer industry, where competition from bigger players
such as HP and Canon limit the growth for smaller companies.
Recent trends in the worldwide hardcopy peripherals market
indicate that the demand for printer hardware is tepid. Lexmark has
also exited the low margin inkjet printer market, and its share in
the industry is on a decline. In a bid to transform its business,
Lexmark is focusing on high margin process management software
services, laser printer hardware and Managed Print Services (MPS).
The company acquired a host of companies this year that will
be integrated with Perceptive Software to bolster its business
process management offering. In this article, we will review
factors that justify our $37.60 valuation of Lexmark.
See our full analysis on Lexmark
Focus On MPS To Drive Growth
According to IDC, the worldwide hardcopy peripherals market grew
by 2.6% in Q3 2013, the first time since Q1 2011. The past trend
indicates that demand for inkjet printer remains tepid, and most of
the growth in printer industry can be attributed to the demand for
laser printers. While the laser printer shipments grew by 5.9% year
over year, inkjet printers grew by 0.5% in Q3 2013.
In the recent quarters, Lexmark's unit sales of printer hardware
and supplies have declined in line with the decline in printer
hardware industry. However, Lexmark has been restructuring its
business in light of the emerging trends in the printer hardware
industry. Lexmark exited from its low margin inkjet printer
business and increased its focus on the higher margin laser
printers. Additionally, the company is offering managed print
services (MPS), under which the procurement, maintenance and other
aspects of printing are taken over by Lexmark.
As a result of this shift in business, Lexmark's MPS contracts
have increased. This has positively impacted its printer supplies
business. We believe that MPS integrated with Perceptive's
solutions will deliver value to Lexmark's growing client base. We
expect MPS to become the biggest driver of revenue in ISS division
going forward. Currently, we forecast Lexmark's market share to
decline from 3.6% in 2013 to 2.4% by the end of our forecast
period. If Lexmark's market share were to remain at 3.6%, our stock
price estimate can increase by 10%. However, if it were to decline
to 2%, our price estimate can decline by 10%.
Acquisition To Drive Growth At Perceptive
The Perceptive software division is the second biggest business
unit and makes up nearly 9% of Lexmark's estimated value. As
Lexmark plans to become an end-to-end solution provider, Perceptive
Software is becoming an increasingly important division for the
company. This division is well placed to offset the slowdown in the
printer and peripherals market. Perceptive experienced annual
growth of 62% in the enterprise content management (ECM) and
business process management (BPM) business in 2012, and reported
$162 million in revenues for FY12.
Lexmark has guided 15% growth in Perceptive's revenue for FY13.
The company aims to achieve this growth through acquistions. The
company has completed four acquisitions this year (PACSGEAR,
Saperion, Twistage and AccessViaj), and these will be integrated
into Perceptive Software, which will help drive its software
business. We also expect the seamless integration of
Perceptive's array of solutions with MPS to bolster revenue for the
company. Therefore, we expect Preceptive's revenues to increase
from $162 million in 2012 to over $500 million by the end of our
forecast period. However, the revenues from this division can be
significantly higher in the future, due to organic and inorganic
growth that can help the company to capture a bigger chunk of $12
billion ECM-BPM industry. If Preceptive's revenues were to
increase to $700, our stock price can potentially increase by
You can drag the trend lines in the interactive charts above
to see how various scenarios for laser printer market share,
cartridges per laser printer and Perceptive software revenues
affect Lexmark's stock value.
We currently have a
$37.60 Trefis price estimate
for Lexmark, which is 10% above its current market price.
a Company's Products Impact its Stock Price at Trefis