KODAK BETS OLD STRATEGY CAN DO DIGITAL
KODAK BETS OLD STRATEGY CAN DO DIGITAL
2005-01-30 at 10:04:00 am #9968
Kodak Bets Old Strategy Can Go Digital
For decades, Eastman Kodak thrived on a classic business model: sell lots of cameras at low prices to chalk up outsize profits on the inks, chemicals and papers used for making prints. That strategy collapsed as the digital revolution and foreign competitors pretty much destroyed Kodak’s longstanding control of the photography business.
But now, with the success of its easy-to-use digital cameras, Kodak is showing signs of making the old model work again.
“In a sense, Kodak has recreated the old relationship between cameras and film,” said Ulysses Yannas, an analyst with Buckman, Buckman & Reid, who rates Kodak stock a buy. “They no longer get profits from capturing images, but the plan is still to sell supplies and services.”
That is still a contrarian position. Kodak shares, which hovered around $60 at the decade’s start, have moved fitfully up and down – but mainly down – in the years since. On Tuesday, the shares closed at $31.55, down 17 cents, but up 58 percent from the low of about $20 set in September, 2003.
Despite the stock’s relatively low price, few analysts see much of a further rebound on the horizon. Only 2 of the 11 analysts who follow Kodak, according to Thomson Financial, rate it a buy. Six rate it a sell and Credit Suisse First Boston just terminated coverage.
Many analysts are skeptical that Kodak will ever be a healthy profit machine again – after all, thermal printer ribbons, coated papers and inks do not offer the 60 percent margins that film commanded.
But Kodak’s supporters on Wall Street say that the consensus view is missing an important element of the company’s turnaround: profit margins for the supplies it is offering consumers and the industrial market can hit, or even top, a comfortable 30 percent.
Kodak cameras and software are selling well, encouraging consumers to take another look at the brand. Its EasyShare digital cameras are neck-and-neck competitors with Sony’s models at about 20 percent of the market each.
As consumers turn to preserving digital images in familiar ways, Kodak has 55,000 self-service kiosks doing brisk business in retail stores, far more than rivals like Fuji and Sony. Kodak’s printing docks and other devices for simplifying the making of prints at home are best sellers as well.
Indeed, Kodak commands nearly 57 percent of the market for snapshot printers – those that make 4-by-6 prints – virtually guaranteeing a healthy share of the market for the coated papers and thermal ribbons such printers use. And even though Kodak does not even make a consumer inkjet printer yet, it is a solid second to Hewlett-Packard in sales of inkjet papers.
“Consumers finally feel emotional comfort with digital photography, and Kodak has come out of nowhere to be a digital leader,” said Vincent Muscolino, a managing director of David L. Babson & Company, a money management firm in Cambridge, Mass., that owns Kodak shares. Daniel A. Carp, Kodak’s chairman, has waited for such recognition since he first laid out Kodak’s digital strategy in September 2003, at the stock’s low point. Not just photography, he notes, but commercial printing and health care are also beginning to pay off.
“The sun, the moon, the stars have all finally lined up,” Mr. Carp said in a telephone interview. “It’s finally going very well, and I’m smiling for a change.”
Mr. Carp hopes to keep investors smiling when Kodak, which earned $265 million on revenue of $13.3 billion in 2003, announces its 2004 results today.
Analysts estimate that Kodak will earn $2.57 a share this year; Mr. Carp has already promised to deliver $3 a share in earnings in 2006, much of it from the digital portfolio.
“The heavy lifting is over, and they are again playing offense, not defense,” said William H. Miller III, who oversees Value Trust at Legg Mason, Kodak’s largest shareholder.
Indeed, Kodak, after trying to pursue just about every possible digital innovation, is getting to the point where it can be more selective in picking which digital bets to raise and which to fold.
Kodak has stopped promoting “You’ve Got Pictures,” its once-ballyhooed project with America Online that was supposed to make it easy for consumers to drop their film at retailers, then receive electronic versions of the pictures by e-mail. Kodak is also taking a $45 million write-off on a digital technology for processing film invented by Applied Science Fiction, which it acquired in 2003.
Those decisions reflected the decline of film use. But Kodak also sold Remote Sensing Systems, a satellite reconnaissance business that is in a growing industry.
“Kodak is no longer asking ‘Is this a good or bad business?’ but rather, ‘Is this the right business for us?’ ” said Jack L. Kelly, an analyst with Goldman Sachs who is nonetheless skeptical about the prospects for its stock.
Kodak spent $817 million to buy Sun Chemical’s 50 percent of Kodak Polychrome Graphics, which sells film-based and digital products to the graphic arts industry. And it has taken over Heidelberger’s share of NexPress Solutions, which makes large digital printers. Those two operations, added to other acquisitions, gives Kodak a full line of commercial printing products.
“Now we can invest in products without having to debate with partners,” Mr. Carp said.
Kodak, which has long sold X-ray systems to hospitals, is also acquiring companies that serve other health care niches. Just last week it bought Orex Computed Radiography, an Israeli company that sells digital radiography systems to dentists, orthopedists and diagnostic centers.
“These acquisitions and divestitures are the tangible manifestations of management’s confidence in its own strategy,” Mr. Miller of Legg Mason said.
The confidence may yet be misplaced, of course. Kodak must still fight Sony and other Japanese companies for digital camera sales. And Xerox, Canon and Hewlett-Packard are formidable competitors in the commercial printing arena.
“Sales are doing better than everyone thought,” Mr. Kelly of Goldman Sachs said, “but we’re all still concerned about profitability.”
Mr. Carp expresses only mild frustration at such caution. “Executing on our strategy is not a trivial task, and I understand why there are still doubters,” he said. But “there are a lot more believers now.”