Lexmark Puts Should Be Purchased Given Competition, Morgan Stanley Says

Investors should buy bearish Lexmark International Inc. options because the second-largest U.S. printer maker may pare this year’s 42 percent gain as earnings growth slows and competition increases, Morgan Stanley said.

Equity derivatives strategists Christopher Metli and Sivan Mahadevan recommended buying September $36 puts while selling September $32 puts, a strategy known as a put spread that cuts the cost of the trade while capping potential profit. Lexmark slipped 1.1 percent to $36.60 at 12:55 p.m. New York time. The shares ended 2009 at $25.98.

The New York-based strategists cited Morgan Stanley industry analyst Katy Huberty, who lowered her rating on the shares to “underweight” on July 14. She cited increased competition with Hewlett-Packard Co. in the laser printer market and less printer inventory restocking by customers. That means last quarter’s better-than-expected earnings aren’t sustainable, Morgan Stanley said.

Lexmark, based in Lexington, Kentucky, rose the most in more than five months on July 27 after posting revenue and profit that beat analysts’ estimates on improving equipment and services sales. Second-quarter profit excluding some items was $1.23, exceeding the 93-cent average of analysts’ estimates compiled by Bloomberg.

To contact the reporter on this story: Jeff Kearns in New York at jkearns3@bloomberg.net.

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