The Silver Lining In The Struggling Printing Industry

By Ryan C. Fuhrmann | August 19, 2012 AAA

On Tuesday, pure-play printing and imaging firm Lexmark (NYSE:LXK) announced it would be exiting its remaining inkjet printer business. The company already had exited the consumer business to favor what was thought to be the more lucrative and stable business market, but the entire industry is arguably in a secular decline that may make growth extremely challenging going forward.

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Industry Struggles
The current state of market difficulties were already a topic because Hewlett-Packard (NYSE:HPQ) announced its imaging and printing business experienced a sales decline when it reported earnings last week. Japanese rival Canon (NYSE:CAJ) has also been struggling in the consumer market and Eastman Kodak failed to diversify into printers, having announced bankruptcy back in January.

The demise of the printing industry has been expected for some time. Well before the current round of weakness, the skyrocketing popularity of the Internet, email and other digital communications was thought to eventually reduce the need for documents printed on paper. It appears that the latest generation of smart phones and tablets, including offerings from Apple (Nasdaq:AAPL) and Google (Nasdaq:GOOG) are finally allowing consumers to rely more fully on data from their screens.

SEE: The Industry Handbook: The Internet Industry

There are growing examples. Airlines now allow travelers to scan their boarding pass from a smart phone. Starbucks (Nasdaq:SBUX) recently inked a deal to let customers pay via their phones and other retailers allow the use of digital coupons. All eliminate the need to carry around a printed copy for transactions.

The Silver Lining
It still remains to be seen if the current struggles are merely a short-term blip or indicative of an overall trend that is reducing printing demand. Few industry analysts see the industry disappearing entirely, and there is likely a coming wave where smartphones and tables add physical printing functionality that they don't currently have.

Additionally, the larger players could end up benefiting. Lexmark was already a declining player in the inkjet market, which means the competitive landscape will be more favorable for the remaining players. The demise of Kodak should also help. This favors giant HP, as well as Canon.

SEE: From Printing Press To The Internet

The Bottom Line
Lexmark's stock jumped more than 10% on the news of its exiting of the inkjet business. However, its printing business overall has struggled for a number of years now. The operational challenges have come through in the stock price, which stood close to $100 per share back in 2004 but is not trading around $21 per share. Over the past five years, the stock is down around 45%.

The printer weakness at HP was a surprise to most investors, so it remains to be seen if it will rebound when the company reports its full year results later this year. HP has had a number of company-specific issues beyond printers to deal with. Over the past five years, its stock is down more than 60%. Canon is down around 40%, which along with Lexmark is due more to deteriorating fundamentals in the printing business.

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At this point, HP and Canon are the likely winners of weaker rivals exiting the industry. However, if consumers continue buying less printers and buying less ink, their printing operations will continue to suffer. Business customer trends should hold up better, but so far have not offset the consumer weakness.

At the time of writing Ryan C. Fuhrmann was long shares of Starbucks (since 1999) and HP (since 2011) but did not own shares in any other company mentioned in this article.

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