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.include "http://www.gurufocus.com/include_stock.php?symbol=lxk"; ?>
Sheldon Shi, Ph.D., editor of Buffetteer.com, a site for intelligent investors.