Lexmark's shares follow its up-market move

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By Rex Crum, MarketWatch

A previous version of this story included a photo of a printer that Lexmark no longer sells. It has been corrected.

SAN FRANCISCO (MarketWatch) -- For too long, Lexmark International Group Inc.'s shares seemed to run parallel to the prices of its personal printers -- cheap and falling. That's started to change.

Lexmark's stock has rallied 35% this year, eclipsing the performance of blue-blooded rivals such as Hewlett-Packard Co. /quotes/comstock/13*!hpq/quotes/nls/hpq (HPQ 46.04, -0.37, -0.80%) and the broader tech sector. H-P shares have added less than 1% this year, while the broader Nasdaq Composite Index /quotes/comstock/10y!i:comp (COMP 2,255, +3.01, +0.13%) index has gained a mere 4% since the year began.

Once known for its $100 printers, Lexington, Ky.-based Lexmark /quotes/comstock/13*!lxk/quotes/nls/lxk (LXK 36.75, +0.27, +0.74%) has drawn new investors by moving away from some of the lower ends of the market -- where customers primarily choose by price -- and expanding sales to higher-paying consumer and business customers.

The results of this turnaround showed up early in February, when Lexmark blew away earnings expectations. The stock jumped 12% on Feb. 2, the day of its profit release, and has added nearly 20% on top of that since then.

"Through the worst market slump we've been through, we grew our services business, got a lot of new, large accounts, and signed a lot of new customers in the retail and financial-services market," said Paul Curlander, Lexmark's chief executive.

He has reason to crow.

Curlander, which took on the CEO role in April 1999, has overseen the shift toward more lucrative market niches and away from the cutthroat, low-end segment. Lexmark stopped selling consumer inkjet printers and started to sell machines with more functions, such as faxing and photo-printing -- putting it in a better position to compete with H-P and Canon /quotes/comstock/13*!caj/quotes/nls/caj (CAJ 43.32, +0.12, +0.28%) .

That turnaround showed up in its bottom line for the fourth quarter, with Lexmark earning $59.8 million, or 76 cents a share -- more than triple the net profit generated in the same period a year earlier. Excluding one-time items, Lexmark would have earned $1.16 a share, far outstripping the forecasts of both analysts and the company itself. See full story on Lexmark's earnings..

Gross margins climbed to 35.7% of revenue, up from 28% in the fourth quarter of 2008, as Lexmark cut its operating expenses to $293 million from $314 million in the prior year. Quarterly revenue dipped slightly to $1.07 billion from $1.08 billion, but sales of higher-margin printing solutions and services rose 4% from the year-earlier period.

'We still believe the downturn isn't over. The economy is still going to weigh on the consumer.'

Paul Curlander, Lexmark CEO

"There was a strong quarter for consumer PCs and that worked well for Lexmark," said Bryan Keane, technology analyst with Alpine Mutual Funds. "The printer market is going to remain strong, especially with PC upgrades from Windows 7, and they're in a good part of the cycle for that business."

But Channing Smith, manager of the Capital Advisors Growth Fund /quotes/comstock/10r!ciaox (CIAOX 15.33, -0.05, -0.33%) , cautioned that some of Wall Street's recent enthusiasm for Lexmark stock may have gone too far, saying: "The stars all aligned last quarter."

Lexmark "benefited from a number of tailwinds, Hewlett-Packard had some weakness in printing, and now you have analysts scrambling all over the board with them," Smith said.