Blue Mountain Capital Management, a hedge fund managed by Andrew Feldstein and Stephen Siderow with $5 billion in assets under management, has reported a position of 3.6 million shares in Lexmark International Inc (NYSE:LXK), a $1.8 billion market cap company which provides printing equipment and develops enterprise software. We track quarterly 13F filings from hedge funds such as Blue Mountain as part of our work researching investing strategies (we have found, for example, that the most popular small cap stocks among hedge funds outperform the S&P 500 by 18 percentage points per year on average) and our records show that the fund has bought all of its shares- which give it 5.6% of the total shares outstanding- since the beginning of this year. See what stocks Blue Mountain reported owning at the end of December.
Lexmark International Inc (NYSE:LXK) recently reported its results for the first quarter of 2013. Revenue was down 11% versus a year earlier, with an increase in sales of services (which reflects recent acquisitions of software companies as the business transitions away from hardware) failing to offset a decline in product sales. Operating income dropped by 40%, and even with a reduced share count earnings per share finished the quarter 36% lower. However, the revenue number in particular beat analyst expectations resulting in a surge in the stock price.
While Lexmark International Inc (NYSE:LXK) has been struggling recently, Wall Street analysts are calling for $3.62 in earnings per share for 2014; the company is currently valued at only 8 times that estimate. 22% of the float is held short as many market players are much less optimistic than the sell-side, and we would be skeptical as well although that pricing is cheap enough that it might be worth further research. We think that Lexmark International Inc (NYSE:LXK) is also interesting due to its dividend: the company currently makes quarterly payments of 30 cents per share, which comes out to a yield of 4.7%. Hedge fund interest in Blue Mountain had been limited; the only fund we track which had over $20 million invested in the company at the end of 2012 had been Iridian Asset Management, a value and special situations fund which disclosed ownership of 3.4 million shares (check out Iridian’s stock picks).
The two closest peers for Lexmark International Inc (NYSE:LXK) are Canon Inc. (ADR) (NYSE:CAJ) and Hewlett-Packard Company (NYSE:HPQ). Hewlett-Packard Company (NYSE:HPQ) has not been in a good situation recently: in its most recent quarter, revenue fell 6% compared to the same period in the previous fiscal year and net income was down 16%. The stock is quite cheap, however, at a forward P/E of 6, and so we think that if it can slow the decline in its earnings Hewlett-Packard could be a value play. There’s more stability at Canon Inc. (ADR) (NYSE:CAJ), with both top and bottom lines showing little change, but as a result the market gives the stock a significantly higher valuation; specifically, it trades at 15 times trailing earnings, and we’d normally want to see earnings growth at that pricing.
We can also compare Lexmark International Inc (NYSE:LXK) to Intel Corporation (NASDAQ:INTC), a larger company which is also working on the transition from hardware to software and services, and to Sony Corporation (ADR) (NYSE:SNE), which is primarily a manufacturer of electronic equipment. The dividend yield at Intel Corporation (NASDAQ:INTC) is about 4%- lower than at Lexmark, but still of interest from the perspective of an income investor. Like HP, Intel has been experiencing declining earnings but the market has reacted accordingly and currently both the trailing and forward P/Es are 12. Sony Corporation (ADR) (NYSE:SNE)actually had its revenue increase by 7% in its last quarterly report compared to a year ago, but with analyst expectations of 35 cents in EPS for this fiscal year (which ends in March 2014) the stock is expensive enough that we would avoid it.
Canon doesn’t look too appealing either, and Intel would have to be at least stabilizing its business for us to consider it at these levels (it might be a good stock to watch for future developments). We are interested in taking a closer look at HP in value terms, though we’d have to be convinced that earnings won’t continue to decline at current rates. A similar logic holds for Lexmark- the business is not doing great, but the stock price is cheap enough to make it worth further research- and certainly the high yield is intriguing as well.
Disclosure: I own no shares of any stocks mentioned in this article.