Lexmark: An Update about a Month Later

Was I catching a falling knife? Here is research on that subject: Falling Knives Around the World Paper

When Lexmark International Inc (NYSE:LXK) announced earnings, the price plummeted further. What I did not want to do is this: http://www.youtube.com/watch?v=VfiY2nbV9RI&feature=related I don’t want to ignore the market’s reaction. I concluded that Lexmark’s intrinsic value had declined due to a lowing of future cash flows, but that price had more than compensated for the news. I decided to hold.

I could have done this: http://www.youtube.com/watch?v=tZnkql_Xkhc or http://www.youtube.com/watch?v=4ywfiKl5fsc&feature=related or http://www.youtube.com/watch?v=CvbTjM5HPCI

But I needed to step back and reflect on the situation and my portfolio’s condition. First, Lexmark International Inc (NYSE:LXK) is not a franchise. It’s business allows some customer captivity for reselling toner, but the business is changing/shrinking while the company transitions into more software services where the company may not have a competitive advantage.

Secondly, management announced and is–so far– returning capital to shareholders, so I view this as an asset/special situation type of investment. Though the overall printing market will shrink, it won’t disappear within five years and if the company can buy in shares at lower prices, value will out unless the business is permanently impaired. A more in-depth view/valuation will be forthcoming in another update.

I noted that about 1/4th of the company shares traded hands on the last big sell-off. I don’t know if that indicated capitulation, but I am estimating that the sellers where not the most informed participants. Why wait to sell after the price of the company has dropped by 50% and AFTER the news has been announced twice?

Since I weight special situation/asset investments smaller than franchise (compounding machine) investments, this was about 1% which I could build to 2% or 3%. I may have 20% of my account in my favorite holding. But I won’t buy more because management doesn’t own a significant share of the business, there are impediments for a take-over and I don’t see management buying shares for themselves.

I would sell if I find a more compelling investment for the capital, especially if I could acquire a tax asset (loss) while having the same margin of safety in another investment.

I hold Lexmark International Inc (NYSE:LXK), and I will have another update in due course.

Update Jan 23, 2013. Unfortunately my target has been reached so I have sold around $28 per share my remaining stake.  Oh no, cash is building up.

Lexmark International