Lexington, Kentucky-based Lexmark International Group Inc. (NYSE:LXK) is a global developer, manufacturer and supplier of printing solutions and products, including laser, inkjet and dot matrix printers and associated consumable supplies for the office and home markets. According to Reuters, Lexmark is presently the No. 2 maker of laser printers that are typically located in office workgroups, behind Hewlett-Packard.

In the next few years, we believe that Lexmark could gain a significant market share in both the monochrome and color printing business sectors from competitors including Hewlett-Packard and Xerox.  In August this year, Lexmark rolled out six new monochrome Optra T printers to replace the successful Optra S line and a high-yield printer cartridge which is capable of printing 25,000 sheets, the highest in the industry for standard printers. "We have effectively replaced our entire line-up of monochrome laser printers with the most technologically advanced and, at $699 to $2,529, the most competitively priced products available in the market today," said Mr. Paul J. Curlander, Lexmark Chairman and CEO, in a company press release.

According to Dataquest, Lexmark has gained market share by almost 60 percent since 1995 while Hewlett- Packard's market share for monochrome printers has declined from 61 to 53 percent.  As reported in Bloomberg, Merrill Lynch analyst Mr. Steven Milunovich told Barron's that sales of Lexmark Z models, which start at $49 after rebates, appears to have surpassed Hewlett-Packard Co.'s low-priced Apollo printers. Hewlett-Packard introduced low-priced Apollo P-1250 model printers early this year to compete in the sub-$100 printer market dominated by Lexmark.

In order to respond to strong demand for Lexmark's product, Lexmark is building a new inkjet plant in Chihuahua, Mexico while expanding its existing plant in Juarez, Mexico.  A new inkjet facility in Cebu, Philippines started production this month as well.

In addition to new product lines of printers, Lexmark began shipping the Kodak Personal Picture Maker this quarter. The $149 digital printer, which is the first product jointly developed with Kodak, enables digital images to be edited, printed or stored without using a personal computer, thus providing an easy way to print and share pictures. From the price point and image quality, we believe that the product will contribute to Lexmark's revenue growth, particularly in the fourth quarter when the holiday shopping season begins. Sales of printer cartridges will be a cash-cow for the year to come.

As expressed by Mr. Curlander in a company press release this month, Lexmark's revenue growth could be impacted by product transition in the corporate market, production constraints in the consumer market, and adverse currency movements. Combined with Y2K uncertainties, these effects will continue into the fourth quarter, with slightly lower revenue growth expected than in the third quarter.

Fundamentals: Our data suggests that investor sentiment for Lexmark's stock does not change significantly despite a 29 percent plunge in the stock price on October 18 on cautious comments from Mr. Curlander that Y2K uncertainties could affect fourth quarter revenue. As of October 21, Lexmark stock is traded at a P/E multiple of 34, based upon 12-month trailing earnings. The "growth" P/E multiple, which represents a ratio between stock price appreciation and earnings growth in the past 12-months, has declined from the recent high of 6.6 on October 8 to 3.3.

We believe that Lexmark stock is relatively inexpensive compared to other high technology companies with comparable growth. Taking Lexmark's cautious comments on the Y2K uncertainties into consideration, we believe that Lexmark should be able to achieve earnings growth in the range between 32 and 34 percent while maintaining a "growth" P/E of 4.  Based upon this figure, our model suggests a 12-month price target for Lexmark to be in the range between $160 and $180. The above estimation could be affected by investor sentiment in which the price target could move up or down as investor sentiment increases or decreases.