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STREET WISE by Amey Stone	April 20, 1999

As investors hunt for bargain stocks now that once-unbeatable technology and Internet shares are taking it on the chin, Polaroid (PRD), which on Apr. 15 reported a net loss nearly twice as large as for the comparable quarter in 1998, is worth a look. It's not necessarily as a buy, however. Rather, the Cambridge (Mass.) leader in the sagging market for instant photography is a reminder that cheap stocks can always get cheaper.

Polaroid is clearly a bargain. It has a p-e on projected 1999 earnings of only 13 and a dividend yield of 2.8%. It traded above $45 a share a year ago but fell steadily to a 52-week low of $16 3/4 on Feb. 1. Since then, the stock has bounced off its lows (thanks partly to takeover rumors reported in BW, see 3/1/99, "Something Set to Click at Polaroid?"). Even amid Apr. 19's tech-stock bloodbath, Polaroid closed at $20 3/16, a gain of 3/8.

Polaroid has looked cheap for a long time now. At the end of 1997, several value investors pegged it as a turnaround play based on new products and restructuring. Brian Posner, manager of Warburg Pincus Growth & Income, picked it in December, 1997, for Business Week's 1998 investment challenge, citing its new management, product introductions, and strong cash flow. But as can often happen with value plays, the turnaround has taken longer than expected.

OBEYING MURPHY'S LAW. Some of Polaroid's new products, including small instant cameras designed to appeal to younger consumers, were delayed. At the same time, emerging markets tanked. For example, Polaroid's sales in Russia boomed from 1995 through 1997, then fell off a cliff in 1998. Inventory reductions by retailers also hurt Polaroid, analysts say. "Anything that could go wrong has gone wrong with this company," explains one fund manager who has been in and out of the stock in recent years. "There's nothing wrong with buying a stock on the prospects of a new product," says Roger DeBard, a portfolio manager at value-oriented investment firm Hotchkis & Wiley, which does not own Polaroid. "It's just that you want [an upturn] to happen in your lifetime."

DeBard is staying away from Polaroid because he doesn't see much of a future for its core business of film-based instant photography. Conceding that he hasn't looked closely at the company's new products, he says: "They stayed with a technology that got superceded by other technologies." Competition from digital photography is a looming threat for Polaroid, and one-hour photo processing on every street corner may be crimping demand for instant photography. "The classic problem with buying companies that have fallen from grace is that on a price basis they may look attractive compared with their prior price level, but you really have to ask fundamental questions," adds DeBard.

It's almost an understatement to say that some analysts who have asked those questions are fairly negative on Polaroid for now. The company reported a net loss for the first quarter of $31 million, or 70 cents a share, compared with a loss of $17 million, or 39 cents a share, in the first quarter of 1998. Revenues declined to $379 million in the quarter from $391 million in the same quarter last year. Currently, analysts expect the company's profits to improve over the next few quarters, and the consesus sees Polaroid reporting $1.56 in earnings per share for 1999 and $2.06 for 2000.

"OVERALL WARINESS." Sounds promising -- though, of course, projections can always be cut. Gibboney Huske, an analyst with Credit Suisse First Boston, continues to rate the stock a hold. "I think the stock is somewhat undervalued, but there is still pretty significant risk associated with earnings," she says. Standard & Poor's recommends that investors avoid the stock based on S&P's "overall wariness" about the future of film-based instant photography.

That's grim news for a company that, on paper, at least, has a lot going for it. Polaroid has about a 90% share of the instant photography market, with only limited competition from Fuji. It has a highly recognizable brand name. It has slashed costs and sold off some noncore businesses. Taking into account Polaroid's sales volume (its 1998 total was $1.8 billion), its strong proprietary technology, and the value of its property, plant, and equipment, "we believe that its value to an acquirer would reflect a price for the stock in the mid-forties," wrote Ulysses A. Yannas, an analyst with Mercer, Bokert, Buckman & Reid, in a Mar. 9 report. He believes the company has until the fourth quarter of this year to produce better sales and profits before its board will look for a buyer.

Yannas also believes that instant photography has a future. Digital photography and one-hour photo finishing are no substitutes for instant prints, he argues. Polaroid's new inexpensive pocket camera "offers the possibility that instant photography might finally be ready to move to the mainstream of picture-taking," Yannas wrote in an Apr. 12 report. The company's first-generation pocket camera was a hit in Japan, but the film wasn't widely available in the U.S., he says. Improvements to the camera, "will bring instant photography to the mainstream," Yannas predicts.

HOT POPSHOTS. Even the first-quarter numbers held some good news. The company's operating loss was smaller than for the period last year and smaller than he expected, says Peter Enderlin, an analyst with First Albany. Plus, the new-product rollouts, under way belatedly, seem to be going well. "Management sounded pretty optimistic on their [earnings report] conference call," he notes. Moreover, the company's sales in the U.S. were up 9% in the quarter, partly reflecting the popularity of PopShots, Polaroid's new single-use instant cameras. Huske believes that Polaroid can grow if it will license its technology to camera makers and focus on selling film for them. "I'm quite sure Canon could make a better instant camera than Polaroid can," she says.

Polaroid is a cheap stock, alright. And that's another of the problems it has to overcome: Unless its new camaras are a hit -- or a suitor shows up to buy it out at a hefty premium -- it just may stay that way.

Stone is an assciate editor of Business Week Online

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