Printer maker Lexmark
Continuing an apparent trend of mixed messages, though, management coupled this nice quarterly performance with a splash of cold water -- the company posted double-digit growth, but it forecast only high-single-digit growth for the quarter ahead. While investors may think that management is crying "wolf," sooner or later they'll be right. Competition in the industry is ramping up, and if a big player like Hewlett-Packard gets desperate, prices and margins could get squished.
While the company has apparently corrected an inventory problem from earlier in the year, accounts receivable were up 21% for the year -- well ahead of the 12% annual growth in sales. Accounts payable also spiked 44% compared with the year-ago fourth quarter. Given that accounts-payable changes should generally track inventory changes (for most companies, accounts payable is largely due to inventory purchases), it's a bit unusual to see such an outsized gain in accounts payable.
Although management had credible explanations for both numbers, Fools should remember that these can be warning signs for declining earnings quality. Lexmark management has clearly earned the benefit of the doubt, but skeptical Fools might want to keep their green eyeshades handy, just in case these trends continue.
With an installed base of roughly 59 million printers, Lexmark has that much-beloved "razor blade" business -- give away the razor, sell the blades -- where the company can reap cash-rich profits from sales of cartridges and other supplies. This approach has worked to the tune of a $1.6 billion cash hoard. Although the company pays no dividend, it does return some of that cash in the form of share repurchases. The company spent $139 million in the fourth quarter to buy back shares and has more than $900 million left outstanding in the its repurchase authorization -- roughly 8% of shares outstanding at current prices.
If you're a Fool looking at Lexmark, you have a tough decision to make. The company is a proven cash generator and posts a return on equity of more than 30% and a return on assets of more than 15% -- both of which are extraordinary numbers. Then again, a trailing price-to-earnings ratio of more than 19 and an enterprise-value-to-free-cash-flow multiple of more than 16 suggest that this isn't exactly a secret. Investors looking for a solid, mature-growth company should take a look at Lexmark but should remember to keep a close eye on the balance sheet.
Fool contributor Stephen Simpson holds a CFA. He has no ownership interest in any stocks mentioned.
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