Stock Option Investment Advice

Lexmark (LXK) Profit up 10% But Future Growth Shaky

As the US nears a potential recession, many consumer markets have seen dwindling demand. Leading printer maker Lexmark International (LXK) has certainly not been unaffected by the market struggles. The Kentucky based company saw sales decline during the fourth quarter. Despite the sales drop. The company did manage to post a 10% growth in profits, surprising the stock trading markets.

The surprising profit growth in spite of declining consumer demand gave the stock help in the market, leading to a more than $3 climb the day of the announcement. The stock is holding around $34 after seeing a 52 week stock trading low below $27 in recent weeks. Analysts currently have a one year target price of $35-36 for the stock, but this expectation could go up or down depending on developments in the coming months in the US economic picture.

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Net income during the fourth quarter was $99 million for Lexmark, which amounted to a $1.04 profit. The fourth quarter of 2006 saw the company earn $89.9 million, or 91 cents per share. There were some restructuring charges which prevented an even stronger profit gain for the company.

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One benefit to Lexmark comes from its strong acceptance in the business market. Many businesses rely on the company to meet their printing needs, as evidence by a 4% growth in business segment revenue. This helped offset the 15% drop in the slowing consumer market, which is more affected by current recession indicators.

Lexmark’s ability to reduce its operating costs in a slumping market is a big part of their ability to make a profit even with lower sales. The company announced plans to move 1,650 jobs to lower cost countries during 2008, in order to help offset flat or declining sales.

The company does expect to earn a profit of 80 to 90 cents per share during the first quarter of 2008, even with economic concerns in its important US market. Last year’s first quarter earnings were 96 cents per share. Analysts see earnings at the lower end of that range – 80 cents. The potential stock warning signs with the lower first quarter sales projections, the consumer market struggles, and low price targets have hurt the stock.

When performing stock research, many stock portfolio management personnel are leery of the limited growth potential suggested by stale earnings and modest consumer market expectations. There is little to excite the stock investing community until consumer market conditions turn around.

Competitive events are another important factor affecting investment strategy for printers. Eastman Kodak Company (EK) introduced a highly anticipated printer line last year with low priced ink cartridges. This introduction is expected to affect the trading portfolio of investors in other printer makers.

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