Twenty years ago, IBM (NYSE:IBM) spun off its laser and inkjet computer printer division to the public, forming Lexmark International (NYSE:LXK). On Tuesday, Lexmark reported strong earnings and its stock popped 18% — one of its biggest-ever one-day gains. Is it too late to go along for the ride?

There are two good reasons to consider such an investment:

• Good earnings reports. Lexmark has beaten analysts’ expectations fairly consistently, doing so in four of the past five earnings reports. In its report on Tuesday, it again beat expectations, reporting adjusted earnings of $1.36 per share — 32% above analysts’ forecast of $1.03 per share. Revenue of $1.04 billion was up 1% from the year before and slightly ahead of analysts’ forecasts. Lexmark is about to stop making lower-end consumer printers and shift to business-focused inkjet and laser models. Lexmark’s focus on printers that are used more often helped increase supply sales in the quarter, according to Bloomberg.

• It is out-earning its cost of capital. Lexmark is earning more than its cost of capital — but it’s stagnant. How so? It produced no EVA momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first half of 2011, Dow’s EVA momentum was 0%, based on first six months’ 2010 annualized revenue of $4.2 billion, and EVA that declined from $162 million annualizing the first six months of 2010 to $152 million annualizing the first six months of 2011, using a 9% weighted average cost of capital.

There are two reasons to avoid Lexmark:

• Declining sales and profits and rapidly rising debt. Lexmark has been shrinking. Its $4.2 billion in revenues have declined at an average rate of 4.3% over the past five years, and its net income of $344 million has declined at a 0.9% annual rate during that period. Its debt has grown twice as fast as its cash. Its debt climbed at 44% annual rate, from $150 million (2009) to $649 million (2010) while its cash rose at a 22% annual rate, from $551 million to $1.2 billion. Its debt compared unfavorably to its industry — Lexmark’s debt-to-equity ratio of 0.43 and long-term debt of $649.2 million place it far behind its competitors.
• Negative growth forecast. Lexmark is expected to show negative earnings growth in 2012 — posting EPS down 2.4% to $4.17. This means it is difficult to evaluate whether the stock is cheap or expensive. However, if it is able to keep growing at the 18.7% rate it posted in the second quarter, its price-to-earnings-to-growth ratio, applying its P/E of 8.2, would be 0.44, making it very inexpensive (a PEG of 1.0 is considered fairly priced).

The key to investing in Lexmark is to consider how much it will benefit from its shift to business customers who use up supplies faster. And in so doing, consider that Lexmark is benefiting from its 2010 $280 million acquisition of Perceptive Software — its product allows companies to digitize paper documents and organize and share them electronically. The benefit for Lexmark has been to add to its corporate-customer base.

This is a pretty risky stock, but if it properly executes a transition to corporate customers, it could continue to enjoy positive earnings growth — contrary to analysts’ expectations.

Peter Cohan has no financial interest in the securities mentioned.