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Was Buffett Wrong on the ‘Mark?

October 29, 2005 | About:
Was Buffett Wrong on the ˇ®Mark?

Did Buffett make a wrong investment in Lexmark International (LXK)? When Buffett filed his acquisition of 1M shares of LXK, it was traded in the $60s. Now it is $43, thanks to a sudden drop in revenue and income for Q3ˇä05. The detailed earning report is not out yet, but this is clear: low prices and low demands in the printer business are hurting Lexmark pretty badly.

LXK has been on my radar for a while. It was hitting all the right marks: revenues and earnings grew steadily, averaging 14% over the last five years. It ranked No. 50 on my S&P500 steady growth rankings. Cash position was $1.1B; debt was a managable $150M; Return on Equity, a measure of how efficient the company utilized captials, was a respectful 27%; the company spent billions buying back its shares. But one thing I felt was missing from the stock was a deep discount: at $60s, its price to owner's earning ratio was 18, yielding zero discount for a 14% earning growth according to the Discount Cash flow Model. That was too pricey to a value conscious investor like me. Was Buffett feeling a little bit the same when he made the purchase? I can't imagine he wouldn't. But he had way too much dough to invest. Just like a titanic ship in a lake, his maneuverability was greatly limited by the size of his portfolio. A deep discount was probably one thing he had to give up to invest in a
company that had been exceptionally well run for more than a decade. In his own words, ˇ°it is better to buy a good company at a fair price than a fair company at a good priceˇ±.

Hindsight is always 20/20. It is true that Buffet could have waited for a few months and save a few millions. But the drop in revenues seemed a bit surprising to everyone including the management. Even so, to individual investors who don't have the kind of dough and are thus more flexible than Buffett, insisting on a margin of safety is paramount to insure against such surprises.

A few months is too short to tell whether Buffett's Lexmark investment was right. But investors should feel lucky that they had a chance to buy something at a much lower price than the sage did. To me personally, however, I'd wait until the earning report is out to gain a clearer picture of Lexmark. Values don't automatically come out from a price drop.

Sheldon Shi, Ph.D., editor of Buffetteer.com, a site for intelligent investors.


Rating: 3.0/5 (2 votes)

Comments

sgeranpa
Sgeranpa - 9 years ago
I too am surprised at the Lexmark purchase. When he bought it (presumably around the $65 mark), it had a p/e of around 14 which I wouldn’t think is low enough for an average business like printing. He could have paid a bit more and got quality businesses in the tech sector (cisco, Microsoft and intel come to mind). As Bill Nygren said in a shareholder meeting earlier this year: “since it is no longer possible to buy average businesses at below average prices, we must instead look for above average businesses at average prices”.

Then again we are talking about Warren Buffett here. The guy knows a thing or two about investing!!!

Joe Pillay
Joe Pillay - 9 years ago
Lexmark printers, in my opinion are not of the best quality. This may be impacting on the stock's price
Geoff Gannon
Geoff Gannon - 8 years ago
I agree this was a Lou Simpson purchase. I wrote a piece on Lexmark for my blog:

http://www.gannononinvesting.com/2006/01/on_lexmark.html

You can also go to my companies page entry for Lexmark, it includes links to some of the best articles on the company:

http://www.gannononinvesting.com/companies/2006/01/lexmark.html

I'm not trying to make this an ad for my site or anything. I just thought the posts and the links provided on my site will give you a lot of info on the company. I find it hard to get a lot of different perspectives on a company from a simple Google search. I thought you might be interested in knowing a put links to a few of the best resources on LXK in one place.

vooch
Vooch - 8 years ago
These are my LXK entries and my current gain/loss percentage:

2005-12-13 $47.134999 -0.53%

2005-08-26 $62.994999 -25.55%

Right now, I'm losing money on this one, but I'm not concerned. It'll bounce back some day.

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