The latest trending news is about how Lexmark International Inc (NYSE:LXK) is shedding its inkjet printers and cutting 1,700 workers. The company is doing this because paper is becoming obsolete. The US Post Office is also facing similar issues due to the increase in email, text messaging etc. People are sending less mail and using less paper.
Below is a good chart which demonstrate the decreasing usage of paper by Americans.
In his book, The Dhandho Investor: The Low–Risk Value Method to High Returns, Mohnish Pabrai coined an investment approach known as "Heads I win; Tails I don't lose much." Q3 2021 hedge fund letters, conferences and more The principle behind this approach was relatively simple. Pabrai explained that he was only looking for securities with Read More
The biggest shock in the Lexmark news is that people are shocked. We see that usage has been declining for a while. The news from Lexmark International Inc (NYSE:LXK) is only further confirmation of this trend. However, despite pointing out the obvious, there is a lesson here for value investors. First, a summary of Lexmark’s news.
Lexmark announced it is exiting the remainder of its inkjet operations in order to improve near-term profitability and focus its efforts on laser, MPS and software. Lexmark will eliminate 1,700 positions and take another $160M in restructuring associated with the inkjet exit and buyback an incremental $100M of stock. The news sent the stock up over 20% today, and Lexmark closed up over 13%.
Deutsche Bank has some interesting observations about the future of the paper industry:
We believe the printing market has entered a period of sustained structural decline. This manifested itself first in the consumer ink market, and is now impacting corporate. As large, well capitalized vendors compete for share in a declining market, we expect pricing
and use (MPS) to remain under pressure. We believe Lexmark’s inability to support continued investment in inkjet speaks this competition.
Another fair and obvious observation. Other paper makers like International Paper Company (NYSE:IP) could be in the news in the near future for similar announcements. International Paper Company (NYSE:IP)’s stock has rallied incredibly since the 2009 market bottom, but the stock had declined so much prior to 2009, that the rally was not surprising. International Paper Company (NYSE:IP) has reported negative cash flow from investment activities in every single quarter since the second quarter of 2010.
The latest news reminds me of something very specific which Jim Chanos mentioned several years ago. Chanos is the CEO of Kyonis Associates, a short biased hedge fund. Chanos was speaking at the Value Investing Congress and discussing what is a value trap? One of the examples is highly relevant here.
I cannot find the exact quote, but Chanos was discussing value traps and he mentioned a company which makes products which will be obsolete. Jim Chanos stated that it could be 5, 10 or more years but eventually paper will no longer be used. Chanos made a very good point with that statement. International Paper Company (NYSE:IP) and Lexmark International Inc (NYSE:LXK) could survive by adapting and going into other industries, but paper seems to be going the way of the Dinosaurs.
Warren Buffett who is a long only investor advices people to invest in companies ‘that you’d be perfectly happy to hold if the market shut down for 10 years.’ Clearly, Buffett would exclude a product that wont exist in ten years. Buffett and Chanos are saying a very similar idea about moats, value stocks and value traps.
Technology is rapidly changing the powerful moats some companies once held. It is hard to know what will be the next ‘buggy whip’ industry/ company, but investors should think whether the product will be around in 10 years. Examples are hard to think of; but one could argue PCs and landlines will eventually be extinct. The question is usually hard to answer, but it is worth the time to consider.
Disclosure: No position in any companies mentioned