Shares of printer maker Lexmark ( LXK) have gotten a little on the pricey side, according to Needham, and as a result, the research firm downgraded the stock to sell from hold.

The note worried at least some investors, who sent the company's stock down $1.33, or 1.9%, to $70.02. Still, that left Lexmark's shares well above what Needham says is fair value at $55, "even under generous growth and margin assumptions."

Needham said Lexmark's partnership with Dell ( DELL) should create value in the long run, but near term, it's likely to drag down Lexmark's gross and operating margins. The reason is that at first Lexmark must sell printers to Dell at a loss in order to build the installed base of printers and subsequent high-margin cartridge sales.

The firm did leave its 2003 and 2004 earnings estimates for Lexmark unchanged.

Needham said it hesitated to downgrade Lexmark, despite its valuation, because it was possible the company could offset the initial negative impact of the Dell arrangement through accelerated sales of high-margin inkjet cartridges, but the firm no longer believes that to be the case.

An added risk for Lexmark, "which is becoming increasingly likely," is the possibility that Dell will strike a supply deal with another printer maker, Needham said. Dell has announced plans to roll out another family of printers, and while it didn't rule out an expansion of its partnership with Lexmark, Needham said its sources indicated that the computer manufacturer was more likely to sign a pact with another printer maker.

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