Lexmark Initiates a Legal Battle - Analyst Blog

Leading printer manufacturer and printing solutions company, Lexmark International Inc. (LXK), recently filed a patent infringement complaint with the U.S. International Trade Commission (ITC) against 24 companies. This legal battle is related to issues pertaining to manufacturing, importation and sale of replacement cartridges.

As per the latest complaint filed by the printing major, ITC has been requested to issue an order against these companies. The requested ban will be on the import and sale of patent infringing laser cartridges to any entity. We believe this could affect the consumable business of the company in the long run.

Separately, Lexmark has also filed these charges against the same companies in the U.S. District Court for the Southern District of Ohio. If the allegations are proved in a court of law, Lexmark will seek monetary damages from these companies.

The recent lawsuit might shift the company’s focus temporarily, but its increasing involvement in the Managed Printing Services (MPS) department is worth mentioning. MPS requires the service provider to take primary responsibility for meeting the customer's office printing needs, which also includes the printing equipment, the supplies, the service and the overall management of the printer fleet.

Lexmark has entered into this business in a big way. Management believes that enterprises spend approximately 3.0% of their revenues on document printout. If the company grabs a portion of this investment, it would lead to substantial business, going forward.

Additionally, Lexmark is enhancing its product portfolio and introducing upgraded versions of the low-end monochrome laser, color laser and laser Multi Functional Printers (MFPs). The company owns and develops most of the technology used in its printers and cartridges in-house. This has helped it to maintain a low cost structure, which enables competitive pricing of products.

Lexmark has a reasonably strong share in the printing and imaging market and is also enhancing the quality and quantity of its product portfolio. This apart, the company is reaping the benefits of a revival in IT spending and witnessing strong customer demand.

On the other hand, Lexmark faces some competition from players like Canon (CAJ), Epson, Samsung and Hewlett-Packard Company (HPQ). We also remain concerned about the increasing availability of cheaper substitutes like ink/consumables supplies that may pose some challenges going forward.

We have an Outperform rating and a Zacks Rank of #3 (short-term Hold recommendation) on the Lexmark's shares.
 
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