Lexmark reports its second-quarter earnings tomorrow. Since we've written about the decline and fall of Lexmark and the recent rise in its stock price, we thought we'd tell you what to look for tomorrow to determine Lexmark's health.
Under its current management, Lexmark has been very conservative in its earnings guidance (what it hopes to earn in the near future). This conservatism has historically created two notable dynamics around earnings announcements:
- The vast majority of Lexmark's earnings announcements have exceeded analysts' expectations, primarily because management guided those expectations lower. This is the epitome of "under-promise and over-deliver".
- Because the future guidance has been so low – with management essentially saying "we don't expect to make much money in the future" – the stock market's reaction has been overwhelmingly negative, driving Lexmark's stock price down the day earnings are released.
Update 7/21/2009: Lexmark announced earnings (before restructuring charges) that were 55 cents, while analysts projected 60 cents per share. Lexmark management also provided lower 3Q guidance. By both missing 2Q expectations and giving lower 3Q guidance, Lexmark was down over 20% in early trading, approaching 12-year lows.
So, tomorrow, don't be surprised if Lexmark beats Wall Street's expectations for the second quarter, and yet the stock price falls because of very conservative guidance.
But these regular dynamics around Lexmark's reporting dates tell us little about the true health of the company. Here's what to really look for tomorrow:
- Failing to meet expectations. If Lexmark fails to meet already-conservative expectations, it is a sign that earnings are deteriorating even faster than Lexmark's management anticipated. It is also a possible sign that Lexmark is entering the death spiral we talked about here.
Update 7/21/2009: As mentioned above, Lexmark missed expectations by 5 cents (nearly 10%).
- Continued / accelerating declines in supplies, especially in PS&SD. The majority of Lexmark's revenues (and the vast majority of its profits) come from its supplies business. In other words, Lexmark makes much more from toner and ink than it does from the printers that use them.
Lexmark's inkjet division (Imaging Solutions Division, or ISD) has seen continuous erosion in its supplies sales, which implies that the installed base of Lexmark inkjet printers is shrinking. Because of the upside-down economics of the printer business, a decline in supplies business can rob the division of its ability to fund future growth, and signal the impending doom for that business.
If the Printing Solutions and Services Division (PS&SD – ISD's larger sibling) continues to lose supplies sales – a trend which started within the last year – then Lexmark's decline will be even more pronounced. Without the supplies-driven profit to 1) maintain its existing business structure and 2) invest in future growth, the company will continue to spiral downward with little prospect for pulling out.
Update 7/21/2009: Overall supplies sales dropped by 18%, and dropped in both PS&SD and ISD (both major divisions). This is a very troubling sign that Lexmark is entering the death spiral we've written about previously.
- Additional restructuring. Over the past few years, Lexmark has announced a series of "restructuring" efforts: Closing plants, reducing headcount, shifting resources, reducing costs. Unfortunately, those efforts have done little to stem the bleeding at Lexmark. If they announce similar moves tomorrow, it is a sign that management is still flailing and failing.
Update 7/21/2009: No additional restructuring was announced this morning.
It is tough to gauge the health of a company from a single quarter of earnings, and tomorrow will be no different. But if some (or all) of these items find their way into Lexmark's earnings report, it will be another nail in Lexmark's coffin, and will be troubling confirmation of the continuing failure of Lexmark's executive team.
Update 7/21/2009: Second quarter earnings indicate that Lexmark is continuing the long, downward slide that we have seen over the past 5 years. As they have 1) invested in ways that don't promote real growth at the company, and 2) made continual strategic missteps, Lexmark's management has slowly bled economic vitality from the company, and robbed it of its ability to invest in the future.