Price Competition Hits the (Lex)Mark

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What had already been a tough year for Lexmark (NYSE: LXK) shareholders just got worse. It looks as though aggressive price competition in the printing market continues to take a nasty bite out of the printer company's profits, and the stock got hammered Tuesday.

For the second quarter, the company produced revenue growth of all of 3%. While the company did see 9% growth in laserjet/inkjet supplies and double-digit unit growth for both printer types, pricing wreaked havoc on the business.

Although Hewlett-Packard (NYSE: HPQ) is the most often mentioned culprit for the price war, this whole matter isn't unlike fights with your siblings -- it doesn't really matter who started it because if it goes on long enough, everyone involved is going to get hurt. So, even if Hewlett-Packard is the catalyst, other competitors such as Canon (NYSE: CAJ) and Seiko Epson are being pulled along as well.

All the same, it doesn't look like Lexmark is going to just sit around and hope that things get better. Along with announcing earnings and lower guidance, the company indicated that it will be cutting 275 jobs over the next year or so. Lexmark's current margins wouldn't suggest that this is really necessary just yet, but if price competition is the new game, it behooves the company to get as lean (and mean) as possible.

It's hard to say how long this could go on, but Canon and Lexmark would seem to have more to lose from a margin perspective at this point. Of course, the name of the game now is decidedly simple -- get as many of your printers into the market as possible. Since the real money (or profits, anyway) is in the cartridge supply business, absorbing short-term pain with cheaper printers can pay off if it means market share growth that translates into higher cartridge sales down the line. But when everybody else cuts their prices in response, that plan doesn't work out quite as well as the PowerPoint presentation would have initially suggested.

I'm not sure this is the greatest time to jump into these shares, but I'm going to start paying a lot more attention now. The company has nearly $9 a share in cash on the balance sheet, a strong product line, and a history of good internal returns. Should the stock go low enough, we could all be looking at an interesting and high-quality turnaround play.

For more on Lexmark and its competitors:

• The HP Way? Cutting Staff by 10%
• HP's Hurd Instinct
• Lexmark Hums Along

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).