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.