The Death of Paper Is Killing These Stocks

by Jeff Reeves | August 28, 2012 12:00 pm

Lexmark International (NYSE:LXK[1]) is soaring 15% today on news that it will be cutting 1,700 jobs and hopefully jettisoning its inkjet printer business[2].

It’s good if you own LXK stock, but don’t get too cheery if you’re a shareholder. Before the announcement, Lexmark stock was off more than 40% year-to-date as revenue, margins and profits have all been on the retreat.

The reason? Well, the tough business spending environment has been painful. But that’s only part of the story. The bigger shift worth noting is the death of paper. As documents become digital and consumers print less, Lexmark’s inkjet business has become a big drag.

Lexmark is not alone, either.

Printer makers Canon (NYSE:CAJ[3]) and Xerox (NYSE:XRX[4]) have cut their earnings forecasts this year. As is typical, they blamed macro events beyond their control — predictably citing weaker business spending in Europe. But it’s hard to deny that the imaging and printing technologies that drive these companies and are so much a part of their history has made them relics of the 20th century and poor fits for the digital age.

Of course, these stocks aren’t doomed. Lexmark remains soundly profitable, though its earnings peak appears to clearly be behind it. LXK reported revenues of $4.2 billion and earnings per share of $4.28 in 2010 … and has been dropping ever since, with forecasts of declines through fiscal 2013.

Xerox and Canon also are very profitable, and have seen their revenue and profits actually improve since the depths of the recession.

Also, these businesses are not solely involved in printers. Years ago, Xerox saw the writing on the wall in its eponymous copier business and has been pushing its self as a business services outsourcing firm — not just for IT and documents, but even finance and accounting help. Canon has tried to capitalize on a push into digital cameras for consumers and medical imaging technologies to replace its office and printer business. And Lexmark Chief Executive Officer Paul Rooke said last month that the company plans to expand its management services and software business.

But the writing is on the wall. Xerox, Lexmark and Canon stock all are down significantly in 2012 vs. a 12% rally for the S&P. More damningly, all have a five-year return of -40% or worse.

The digital age has claimed many victims, and continues to rack up the carnage as the mobile revolution takes technology to the next level. Dell (NASDAQ:DELL[5]) reported poor earnings[6] a week or so ago as PC and laptop sales have dried up, and Hewlett-Packard (NYSE:HPQ[7]) followed suit with equally ugly earnings[8] for similar reasons.

In fact, desktop computers and inkjet printers have a very similar story to tell, especially at HP. The company reshuffled its org chart earlier this year to roll printers into its computer division[9].

The shakeup in tech is far from over, too. Even Intel (NASDAQ:INTC[10]) has had to lower guidance as a result of not transitioning away from chips for older computers into a mobile semiconductor age.

The bottom line: Every segment of the computing market has been affected by the past decade’s advancements. And while Lexmark stock might be rallying today, it’s going to be incredibly hard to fight against this tough long-term trend.

Don’t bank on a turnaround in any of these stocks. They might not be dead in the next few years, but it’s going to take some big innovations and big strategy changes to put them back in growth mode.

Oh yeah, and you have to hope that tech giants like IBM (NYSE:IBM[11]) or Google (NASDAQ:GOOG[12]), to name a few, don’t get there first.

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.”[13] Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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