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 user 2008-02-04 at 11:42:00 am Views: 28
  • #19836

    Kodak’s picture not so rosy beneath the headlines
    Kodak  was once the grand dame of the photo biz but in recent years
    it’s more famously known as the anchor around Legg Mason Value Trust 
    manager Bill Miller’s fund, or maybe just as an exercise in perpetual
    downward motion. It’s been about two years and $10 a share of further
    declines since I first started complaining that Miller should dump his
    giant Kodak position. He started buying in the $50s – today the shares
    are slumping around $20. In November, with the shares slumping again,
    Miller was still bullish though calling for a target price of around
    $45 — less than he paid for the stock seven or eight years ago.

    Kodak has declared that its long night, the four-year restructuring
    plan put in place by media-beloved CEO Antonio Perez, has come to an
    end. After cutting over 27,000 jobs and spending $3.4 billion on
    restructuing charges (originally, he was only going to spend up to $1.7
    billion, but who’s counting?), Perez now declares Kodak revitalized.
    And some early headlines reflected this seemingly great news, too.
    “Kodak Earnings Surge As Four-Year Restructuring Ends,” Bloomberg
    reports. “Kodak Picture Brightens,” Fortune says. “New Focus Boosts
    Kodak Net As Digital Sales Increase 15%,” the Wall Street Journal
    reports. Where did they get that? Well, Kodak says its net income
    jumped to $215 million, or 71 cents a share, from $16 million, or 6
    cents a share, a year ago. Great news, huh?But if you scroll down to
    the very, very bottom of Kodak’s happy yet convoluted press release,
    you’ll find a very different picture. Fourth quarter earnings before
    taxes from operations the company still owns declined 2% to $109
    million. Well, that includes restructuring charges and interest costs
    and all kinds of other stuff, so what about just earnings from
    operations still owned? Down 29% to $130 million.

    What’s going
    on? A lot of the bottom line improvement came from units that Perez
    sold last year, like the health care imaging operation. Units Perez
    sold added $123 million of net income, or 40 cents a share, to the
    reported profit in the fourth quarter. Check the math — units Perez
    sold actually earned more than the units he kept. This Perez guy may
    have a future as general manager of the Minnesota Twins! Furthermore,
    the bottom line got a nice bump from a tremendous drop in the provision
    for income taxes to $17 million from $126 million in the fourth quarter
    of 2006.Ultimately, Kodak’s old film businesses will go to nothing and
    its digital businesses, including the growing ink-jet printer effort,
    will keep growing. But the old biz was highly profitable — it showed a
    15% profit margin in the quarter for 2006 and 9% in 2007. The new biz
    is much less cushy – with a fourth quarter margin of 4% the past two
    years. Kodak’s commercial graphics business likewise shows a 3% margin
    in the fourth quarter. And just stop and think about it for a minute:
    Kodak is growing in markets that are ultra-competitive, require lots of
    R&D spending to stay current and offer cut-throat margins.
    Meantime, its near-monopoly market is shrinking away to nothing. Sounds
    like the kind of revitalization investors can do without.

    Kodak anticipates launch of products this year
    2008) — Eastman Kodak Co. jumped into the desktop printer market last
    year with its All-in-One, promising to sell 500,000 by year’s end. The
    company exceeded its goal, selling 520,000.Now, Kodak is promising to
    roll out other products in coming months that represent new
    technologies or business areas.The first such introduction is expected
    this week, with Chief Executive Antonio M. Perez talking about a new
    product based on “a series of breakthrough technologies.”Director of
    Public Affairs John E. Richardson declined to elaborate Friday.But
    Perez, in a conference call with the investment community earlier last
    week, said the new product revolves around technology Kodak announced
    about six months ago.That may mean the company is about to make
    commercially available its digital camera image sensors that it says
    will take vastly better pictures in low light than what consumers see

    Kodak announced the new image sensors last June and said
    then that it expected to roll out the technology in early
    2008.Meanwhile, Perez also said last week that in the next six months,
    cell phone giant Motorola Inc. will announce products that have a Kodak
    contribution.The two companies are in a 10-year collaboration on
    various projects involving imaging combined with mobile communications
    technology, such as improving the quality and transmission of photos
    taken by camera phones.Kodak also plans to unveil this spring its
    long-promised commercial printing technology of continuous inkjet that
    runs at high speed and high resolution. Perez said last week the
    company will show off the continuous inkjet technology, called Stream,
    in May at drupa 2008, the world’s largest commercial printing trade
    show.Some of Kodak’s latest products will be on display Thursday in New
    York City as the company holds its annual meeting with institutional
    investors.Perez also is expected to lay out the company’s aims for 2008
    and the next several years.