Kodak's picture not so rosy beneath the headlines

Posted by: Aaron Pressman on January 30, 2008

Eastman Kodak (Symbol: EK) 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 (LMVTX) 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.

Today, 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.

Reader Comments

Luis B Aramburu

January 30, 2008 3:34 PM

It seems Kodak is the premiere CEO destruction company. Even George Fisher which was considered almost god (by fellow CEOs) when he took over the helm couldn't fix the company or prevent HIS reputation from being destroyed. How many successive CEOs have been destroyed by Kodak? Six, seven... I've lost count. I think we need a brave and common sense person that states it as it is: "Hey, guys, this company cannot be saved. We need to liquidate it." Not even Steve Jobs could save Kodak. And that is saying a lot.

Danny Blount

January 30, 2008 3:40 PM

not to mention the failed efforts at PACS and limited market share in radiologic suites.

Robert Goodman

February 1, 2008 12:47 PM

Kodak holds patents in digital imaging and display technology that could enable the company to be a market leader as it is in the film business. Unfortunately, there seems to be a desire on the part of management to ignore building on those strengths and instead focus on expanding into weak businesses.

John Thompson

February 5, 2008 7:46 PM

OK so what should Kodak do? Which businesses today are NOT ultracompetitive and need constant innovation to stay ahead in? I mean i really would like to find a solution - not just for Kodak but also Motorola, HP, and a host of large American giants.

Dr. Serendipitous

February 6, 2008 8:44 PM

There is no single solution; however, there are common threads to the problems of Kodak, Motorola, and other American technology companies that are in trouble. One major thread in their cases is that those companies are not run by visionaries with the detailed knowledge of their products and their developmental potential, while the successful ones, such as Apple and Microsoft, have CEOs who are intimately involved with their companies' product development. In just about all of the troubled cases, their CEOs should never have been given positions beyond the CFO. Another common thread is that just about all of those troubled companies were blessed with rapacious and impatient major American shareholders who would not hesitate to sell their mothers just make a fortune. The problems are really structural, and that's why old tech giants often fail and new tech startups would have to take up the slack with new visions without all that baggage.

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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