Taking Stock Of Vendor Inventory

dealing with an inventory glut

Analysts at Merrill Lynch have dropped their rating on printer vendor Lexmark--which reported its quarterly earnings Monday--from "buy" to "neutral," in large part because the company had too much inventory on the books. In an e-mail to investors, the analysts wrote:

Inventory rose 6% sequentially [vs. 1% sales growth] and is too high by $40-50 million. Consumer inkjet demand was soft in 3Q. Although inventory should fall in 4Q, Lexmark is cutting back on production, which could negatively impact the 4Q gross margin.

Since Lexmark OEMs printers for Dell, there may be some ancillary questions about what's going on in Round Rock.

For what it's worth, Dell remains one of the largest customers for both Lexmark AND Intel, which have both reported softer-than-expected orders in some segments and are both reporting larger inventories than they would like. (And, like Intel, Lexmark reported softness in the consumer space.)

Despite that news, Lexmark still reported double-digit unit growth and a higher profit margin compared to the same quarter a year earlier. Intel is also reporting both sales and profit growth.

And, Merrill Lynch said in its investor note that it still likes Lexmark stock, but just doesn't see a big near-term plus in it.

In the interim, it may be a good idea to keep an eye on Dell (as well as CRN's monthly solution provider survey) to stay informed about what's going on with inventories and pricing in the industry, and whether this may be a short-term blip or a long-term issue.