After a spectacular 4th quarter in which earnings rose 46% and easily beating consensus earnings estimates, this stock got a much-needed boost and is heading higher. This is after the stock plunged in October after its longtime CEO announced he was retiring. Now is the time to get on board this stock and join Lexmark’s (LXK) rise to new highs.
Awesome Quarter
For those that don’t know, Lexmark develops, makes, and supplies printing and imaging solutions for offices. It offers laser printers, inkjet printers, and multifunction devices, as well as cartridges and other supplies, services, and solutions.
Earnings for the fourth quarter came in at $1.29 per share, which surpassed expectations of $1.11 per share. Management also boosted first-quarter forecasts to a mean of $1.23 per share, which is above estimates from $1.16 per share. So what grew during the quarter? Lexmark’s software segment showed strong growth north of 40%.
“2010 was a very good year for Lexmark,” said Paul Rooke, Lexmark president and chief executive officer. “We grew revenue 9 percent driven by a record performance in laser revenue, significantly expanded our operating margins, and generated cash flow of more than half a billion dollars.”
Cheap Valuation
Even after the post-earnings bump, the stock is attractively valued. It is currently trading at only 9.1x 2011 estimates of $4.39 per share. I expect analysts to raise that forecast as the year progresses based on their earnings momentum. It is also trading at only 0.74x sales. The stock only has a market cap of $3.1 billion, so there is a lot of room to grow.
Its earnings history has been spectacular over the past four quarters. Lexmark has posted an average surprise of 28% during that time period. The current valuation will look even cheaper if the company can continue its recent string of blowing away analyst estimates. I think a reasonable price/earnings ratio for the company is 12x estimates, so that would take the stock to just over $52. That would be a nice return from these levels.
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