Lexmark Will Continue Its Spiral

Implications: Lexmark is facing a "perfect storm".  The unprofitable inkjet division continues to decline.  Should the firm let the ink jet product line continue to decline (and accept an eventual 'phase out' of the product segment), or drive product placements and accept the associated hardware losses? At the same time, the firms profitable laser printer business is under attack from HP.  Can the top business printer exec - Marty Canning, turn around this decline? And finally, the companies consistent lack of a turnaround strategy continues to go unanswered, as the CEO, Dr. Curlander, engineers a debt fueled stock buy-back in order to retain control of the company. Will the company make fundamental changes, or will it enter a phase of decline that cannot be reversed?

Analysis:  The Photizo Group model has predicted a decline in Lexmark's profitability during the last half of 2008 after the company had pumped up  earnings in the first half of the year by reducing ink jet shipments.  Based on this article, it now appears that the Lexmark model is again (for the 6th quarter in a row) right on target!

Lexmark is facing a significant dilemma.  The firm has to either accept a decline in this already challenged product line to the point of 'no return' or, drive new product placements which will have a significant negative impact on the firms financials.  The much touted 'breakthrough' wireless products have met a 'ho hum' reception from the market, while they have proven very easy to replicate.  The firm continues to have a significant brand image problem in the intensely competitive consumer ink jet market, and despite this, the firm sticks to the same basic strategy that it has had for the last five years in this segment - "engineer a better product".  The executive team refuses to accept defeat and withdraw from the segment, so this market continues to be a drag on earnings and management talent.

At the same time, the once highly profitable business printer (laser) division is under attack from HP and other competitors.  The firm has lost its technology advantage and the current management team appears to be losing their grip on the firms vertical market differentiation, the key advantage the firm has had in the market.

And perhaps the greatest blow of all is the loss of loyalty from the companies real core strength - it's extremely experienced, and (formerly) dedicated workforce.  However, as the company continues to decline while top execs receive generous bonuses, the companies moral is falling and commitment and loyalty of the workforce is rapidly fading.

Despite the lack of action from a very weak board, the executive team appears to be worried and is utilizing a debt based stock buy-back strategy in order to avoid losing control of the company.  This seems to be a classic case of "Nero fiddling while Rome burns".   Neither the board nor the major investors appear willing to step in and try to shake up the top management team in order to turn this business around.

Unfortunately, at some point this will make a great Harvard Review case study.  But for now, it appears that the company is going to continue to be an interesting play for 'short' players as it continues its long decline.