Printer manufacturer Lexmark (NYSE:LXK) reported both good and bad news today. First, the good -- despite a product recall and a disappointing back-to-school shopping season, the company posted a solid 9% increase in third-quarter sales to $1.27 billion. More importantly, net income jumped 50% to $156.1 million, or $1.17. Backing out a one-time $0.15 income tax gain, earnings still grew 29% to $1.02, easily outpacing analysts' projections. Unfortunately, the ink from this quarter had not even dried before warning signs surfaced of problems in the next.
Management forecast that top-line growth in the fourth quarter would slow to the mid-to-high single digits and cautioned that earnings would likely fall somewhere between $1.05 and $1.15, including another tax gain of about $0.05. The low end of that range represents flat growth from the year before, and the high end would only match, but not beat, Street estimates.
The silver lining is that much of the reduced outlook ($0.07 to $0.08) stems from ramped-up marketing efforts to help brand awareness, which should have a positive impact somewhere down the line. Troubling, though, is the underlying cause for the new advertising campaign -- market uncertainty and "the potential for aggressive price competition" from rivals such as Hewlett-Packard (NYSE:HPQ) and Canon (NYSE:CAJ).
Any momentum that might have resulted from posting impressive third-quarter numbers was more than offset by the reduced outlook, and the net effect is a stock that is trading several dollars lower. The pattern is somewhat reminiscent of three months ago, when Lexmark fell on inventory concerns, despite announcing double-digit gains in both second-quarter revenues and earnings.
Lexmark has worked to build an installed base of printers -- often selling them near, or in some cases even below, cost -- to drive recurring sales of high-margin consumables such as toner and replacement ink cartridges. With companies like Dell (NASDAQ:DELL) -- which sells Lexmark manufactured printers under the Dell brand name -- exploring ways to reduce the cost of printer supplies, Lexmark's operating margins (which just rose a full 2.5 points to 14.6%) may come under pressure.
Lexmark is a well-run company with a solid balance sheet, healthy cash flows, and steady growth, but with reduced guidance reflecting "a very weak consumer market" and mounting competition, I'd expect to see more mixed news going forward.
Fool contributor Nathan Slaughter owns none of the companies mentioned.
