Will Lexmark continue to be a "Dog" stock?

Implications: In 2007 Lexmark again had a significant earning miss and their stock has lost almost half of its value. This happened even though the company poured a huge amount of cash into stock repurchases. It is irrational for a management team to make these repurchases if they had any idea that they were so far off the mark on earnings.

Analysis: Lexmark had a significant earnings miss in the 2nd quarter of 2007. In addition management significantly lowered their guidance for the rest of 2007.
Lexmark had a similar miss in the 2nd quarter of 2005. This miss was followed by a positve earnings surprise in the first quarter of 2006. There were similar misses and surprises in previous years.
Lexmark's earnings primarily come from sales of ink and toner. In general they lose money on printers. The supplies revenue is relatively predictable. The supplies business also gives them some flexibility in moving sales/profits across a quarter boundary.
When an earnings miss occurs one must assume that they were unable to incent the channel to take on additional inventory in order to hit their goals. When this happens there may be a tendency to get all of the bad news and then some out on the table and even reduce channel inventory.
Tactics like this could be responsible for an earnings miss followed shortly by a positive surprise. There are some who would regard these results as a great opportunity.
Unfortunately Lexmark's long term trend is not good. They have not kept up with the industry in their investments in inkjet technology. Their most recent products have embraced wireless technology but the basic print technology is old by industry standards. HP and Canon have spents billions while Lexmark spends in the range of $100 million/yr on inkjet R&D.
Their business division has been late getting into the color laser market and their products have suffered from print quality problems.
Management is changing the focus of the inkjet business away from consumers toward small and medium business. This is a risky move without better printing technology.
The business division is healthy but under attack from HP and is experiencing pressure on margins.
These problems did not spring up overnight. Management has been slow to make changes and is extremely conservative. Spending several billion on stock repurchases appears to be a poor use of cash. This money should have been applied to R&D or a strategic acquisition.
In conslusion, Lexmark might produce a positive earnings surpise but fits the description of a "Dog" stock and will continue to do so until there is a significant change in direction.