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Lexmark (LXK) Q1 Earnings: Surprise in Store for the Stock?

Lexmark International Inc. LXK is expected to report first-quarter 2016 results on Apr 26. Last quarter, the company posted a negative earnings surprise of 1.69%. Let us see how things are shaping up for this announcement.

Factors to Consider

Lexmark’s fourth-quarter 2015 results failed to make a mark as the bottom line missed the Zacks Consensus Estimate while the top line was almost in line. Also, revenues decreased on a year-over-year basis, primarily due to lower Inkjet Exit revenues and the impact of foreign currency fluctuations. Lower revenues from imaging and software solutions also impacted overall results during the quarter.

Nonetheless, synergies from the recent acquisitions (Kofax and Readsoft) and renewed focus on the software space could set it back on the growth path. Moreover, the Inkjet exit, software prospects and the managed printing services (MPS) approach are positives that will drive shares in the long term.

Additionally, the company recently agreed to be acquired by a consortium led by Apex Technology Co., Ltd. and PAG Asia Capital. Legend Capital Management Co. Ltd. is also one of the buyers.

In our opinion, the deal will prove beneficial for Lexmark as it has been struggling amid changing industry dynamics. Lexmark has a strong market position but declining demand for traditional printing hardware and overall macro uncertainty have been impacting its overall performance.

The deal however may face some challenges. This is because the takeover of U.S. companies by Chinese organizations is not a simple process. In recent times, China's Unisplendour Corp Ltd failed to acquire a 15% stake in Western Digital Corp. WDC after CFIUS, an inter-agency committee of the U.S. government, demanded an investigation to ensure that national security wasn’t being compromised.

Earnings Whispers

Our proven model does not conclusively show that Lexmark is likely to beat the Zacks Consensus Estimate in the upcoming release. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. Unfortunately, this is not the case here as elaborated below.

Zacks ESP: The Earnings ESP for Lexmark is 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at 85 cents per share.

Zacks Rank: Lexmark’s Zacks Rank #1 increases the predictive power of ESP. However, when combined with a 0.00% ESP, it makes surprise prediction difficult.

We caution against stocks with a Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Stocks to Consider

Here are some companies, which are worth considering, as our model shows that they have the right combination of these two elements:

Boyd Gaming Corporation BYD, with Earnings ESP of +36.0% and a Zacks Rank #1.

Benefitfocus Inc. BNFT, with Earnings ESP of +4.00% and a Zacks Rank #1.

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WESTERN DIGITAL (WDC): Free Stock Analysis Report
LEXMARK INTL (LXK): Free Stock Analysis Report
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