Printing was a growth industry just a handful of times in history: papyrus in Egypt, the printing press in Germany, and laser printing in California. Outside of these revolutions, transferring words, pictures, and ideas to paper was and still is not a very exciting investment prospect. But such unexciting industries are where you can find some of the best investments, as companies quietly churn out returns and navigate changes without any press-worthy hiccups. One such company in printing is Lexmark International (LXK).
Source: Lexmark's Flickr.
Printing is dead
Sure, with smartphones and other mobile devices, the average consumer probably prints fewer maps, photos, and boarding passes. But Lexmark has left that inkjet business behind, as it sold off that business segment in 2013 for $100 million to Funai Electric. And based on Hewlett-Packard's (HPQ 1.55%) latest quarterly results, consumer printing is experiencing headwinds. In the first quarter, HP's printing segment saw revenue decline 5% year over year and remain flat sequentially.
On the corporate side, paperless offices are finally actually printing less, at least in developed countries. Worldwide page volume fell 1.5% from 2011 to 2012 according to IDC, but grew 10% in Asia (excluding Japan) and 7% in Latin America. And while a lion's share of Lexmark's revenue comes from developed countries, 20% of its revenue comes from outside the U.S., Europe, the Middle East, and Africa.
HP's results also prove a slowing, albeit steady, commercial printing market. Its commercial hardware units increased 3% year over year, while printing supplies revenue dipped 6%. For HP, printing makes up over half of its revenue and is actually its highest margin business with a 19.5% operating margin. It seems, similar to Lexmark, HP will live off of printing while exploring new businesses.
For Lexmark's Imaging Solution Services segment, this means revenue will likely continue to decrease at a slow rate, especially as its inkjet supply business trails off. But this segment isn't why Lexmark makes an interesting investment proposition -- it's the Perceptive Software segment that grew revenue 38% year over year in the last quarter.
But Lexmark is alive
Lexmark has grown its Perceptive Software segment by acquiring a bunch of companies: about $150 million in 2013 acquisitions and $250 million in 2012, not including the most recent $182 million purchase of ReadSoft. Past acquisitions include Twistage, which provides a butt (broadcast using this tool) software platform for managing video, audio, and images; Saperion, which offers document archiving; PACSGEAR, which offers health care companies a way to capture, manage, and share medical images and documents; and Acuo, which offers clinical content management for health care providers. ReadSoft helps "automate business document processes," which includes sorting documents based on scanned information.
With its Perceptive Software business, Lexmark now targets the entire "lifecycle" of content, from its creation to hardcopy to archival, which means its customers only have to deal with Lexmark for content management needs, and as a customer buys one service, Lexmark has established a relationship to sell its other offerings.
Of course, there's plenty of competition in Lexmark's new direction, and several competitors are much larger. There's no guarantee Lexmark can outperform the competition, but its smaller size means its recent acquisitions will have a more profound effect on its overall business. Additionally, its pivot away from traditional inkjet printing demonstrates how a small company is more nimble. And demonstrating its competitiveness, Lexmark likes to boast that in the past 24 months, it's won 20 new management services contracts with Fortune 500 or Global 500 companies.
Lexmark: A boring buy
Document management is an incredibly boring business. And this means Lexmark's stock price isn't inflated with hype. It has a low P/E ratio of 11.5 because of falling print revenue as it exits the inkjet market, but as investors wait for its new business segment to pick up, the stock offers over a 3% dividend yield. And over the past four years, Lexmark has reduced its share count by over 20%. This stockholder-friendly management paired with a business ready to turn around should make Lexmark worth a closer look for your portfolio.
