Street Patrol
Recent articles:
• IBM now a wait-and-see stock, 4/15/2005
• Can Wal-Mart's PR campaign save its stock?, 4/14/2005
• How to buy into the oil boom, 4/7/2005
More...
| | Street Patrol
Kodak's turnaround still looks unfocused
The company is having some success pushing its way into digital photography, but it comes just as digital camera growth may be slowing. And many other problems remain..
By Robert Walberg
Eastman Kodak's commercials are legendary. My fiance actually cries at some of the Kodak images flashed across the screen. The message is simple -- buy Kodak cameras and film to capture the special moments in your life. Ironically, like a picture, Kodak's financials also appear to be frozen in time. Unfortunately, the numbers aren't special, though they might make you cry.
Eastman Kodak (EK, news, msgs) ended 2000 with revenues of about $14 billion and net earnings of $1.4 billion, or $4.62 per share. Flash forward to 2004, and the company's sales totaled $13.5 billion, with net earnings slumping to $556 million, or $1.94 per share. The EPS comparison would look even worse if the company hadn't reduced the total number of shares outstanding by nearly 19 million.
Five years and sales have barely budged. No wonder the company was kicked out of the Dow Jones Industrial Average ($INDU). Kodak might be a household name and a leader in the digital camera and consumer-film industry, but it's no longer one of America's top companies. And it certainly can't be classified as a growth company anymore.
In fact, one of the few number changes that stand out at Kodak over the last five years is the total number of employees. The company that likes to promote all the happy moments its products capture on film created 22,700 very sad moments for its workers over the last five years as worldwide headcount went from 77,500 in 2000 to 54,800 in 2004. Smile! In the name of "improving operating efficiencies," you've been canned. Yep, another Kodak moment.
Making changes
To its credit, Kodak's management is trying to turn things around. Slow to adapt to the consumer shift to digital, Kodak saw its numbers sag badly from the late-'90s into the early 2000s. (The stock is down 67% from a peak hit in 1997.) In September 2003, the company announced a new strategy to accelerate growth by focusing on digital. It also reorganized its operations into five primary units: digital and film-imaging systems, health imaging, commercial printing, display and components and commercial imaging.
Of these units, digital film, imaging systems and health imaging accounted for roughly 88% of total revenues, with the bulk of that number (68%) coming from its film and imaging unit. The bad news is that the digital film and imaging sales remain below where they were five years ago.
Again, a big reason for the soft numbers was Kodak's stubborn refusal to adopt digital technology in its infancy. But Kodak is making up for lost time with a host of attractively priced products that have vaulted the company into third place in the global battle for digital-camera market share -- 11.8% behind only Sony (SNE, news, msgs), at 16.7%, and Canon (CAJ, news, msgs), at 17.1%.
Kodak has stolen share by offering its products at lower prices than the market leaders. This approach may win the company even more share in the upcoming year, but investors need to ask: At what cost to margins and profits? Also, can Kodak eventually compete and win at the higher-end of the digital camera market? If not, the commoditization of digital cameras will only continue to cut into the company's margins.
A key market slows
Another concern for investors is the fact that growth in the digital camera market is slowing. According to the research firm IDC, nearly 74 million digital cameras were shipped in 2004, up 51% from the year earlier. Admittedly, 51% growth is still impressive, but it's down from 71% in the prior year. IDC is forecasting growth this year of about 22%, with the U.S. market growing at a rate of only 10%.
Again, 22% growth is nice, but, given the intense competition and the declining growth rates, how much more can Kodak expect to gain from the digital market that it was so slow to embrace?
Even Kodak's big early lead in the online photofinishing market with its Ofoto service is threatened these days. (Kodak is renaming the service Easyshare Gallery.) Hewlett-Packard (HPQ, news, msgs) recently acquired Snapfish, the third-largest online photofinishing company, and Yahoo! (YHOO, news, msgs) jumped into the game with its purchase of Flickr.
One reason for all the competition is that growth in the online photofinishing market is expected to be considerable. Infotrends sees the business growing from about $160 million in 2004 to over $630 million by 2008. Huge growth, but even so the market is relatively small, especially for a company Kodak's size.
Encouraged by Kodak's efforts to turn the business around, share gains in the increasingly competitive digital camera business and the slight improvement in results over the prior year, investors have sent the stock up more than 23% over the past 52 weeks.
Kodak is scheduled to report first-quarter earnings on Friday. If the earnings are decent, the stock could get a small, short-term boost. But, in deciding whether the company deserves the benefit of the doubt in its turnaround effort, investors will focus more on what the company says about its prospects for the balance of the year, especially given the declining growth in the digital camera market.
Taking on debt
Investors will also be looking at how Kodak has progressed in integrating Creo, the Canadian-based maker of printer software that it acquired in January for nearly $980 million. Though the purchase of Creo is expected to add to earnings by 2006, the added debt to acquire the company didn't sit well with many investors who were hoping the company would continue its recent efforts to shore up its balance sheet.
Bottom line, Kodak is still a company in transition. Management has added a few pieces here and cut a few pieces there and now hopes to blend it all together into a dynamically growing company focused on the new digital age. It all sounds good. But it's too early to tell if the management is on the right track or if this is just another false start for a company that has seen revenues slowly slide for nearly 10 years.
Value hunters might find the stock appealing because it trades at only 11.9 times estimated 2005 earnings of $2.59 per share. If the company meets that projection, the stock should climb a bit through year-end. First resistance is in the $34-$35 per share area. But traders should note that, because of the company's inconsistent earnings and lackluster sales, the stock has traded well below market multiples for several years.
Consequently, investors should not be looking at the companys forward multiples and expect that if the company merely hits its targets over the next year or so that it will achieve a market multiple. The stock has averaged a price-to-earnings multiple of about 13 times forward estimates. The P/E of the Standard & Poor's 500 index ($INX) this week is about 19, according to Barron's. Considering the uncertainties surrounding its growth prospects, acquisition strategy and earnings, average is about the best investors can hope for.
Venomous e-mail
Follow-up: In last week's Street Patrol column, I noted that Wal-Mart Stores (WMT, news, msgs) realized that it needs to enhance its image with the public given stories surrounding its employee practices, alleged hard-line tactics with suppliers and union battles. These issues have weighed on the stock over the past few years and need to be addressed. But the battle to win over consumers might be more challenging than the company expects, at least if the e-mail I received is indicative of broad sentiment. Here are just a few of the surprisingly harsh e-mails:
"Wal-Mart is a disgusting example of American greed. They choke the life out of small-town businesses and in many cases the entire business district. Fortunately, the public is beginning to wake up to Wal-Mart, including people like my sister, her friends and co-workers. They live in a suburb of Madison, Wis., and have stopped shopping at Wal-Mart and all affiliated businesses, a.k.a. Sam's Club. I hope they go down in flames."
"Competition is good. Unconscionable behavior with suppliers and competitors is illegal. But ... of course they are financially successful."
"I not interested at all how Wal-Mart stock is performing or not performing nor how many jobs it is creating in my community nor that it is non-union or its wages and benefits are less than other stores. All of those and anything is incidental to my (and a lot of other people's) basic hatred of Wal-Mart and other companies like Wal-Mart who come in and destroy in a matter of months or years (if we're lucky) a way of life that has existed for generations. Not just replacing one store with another but wholesale transformation of local economies. Beyond the economy, there is more to life than working, and Wal-Mart destroys that, too. This country was much better sans Wal-Mart (and others like it), and I for one don't regret one bit looking back on a way of life that sadly my children won't be able to enjoy."
At the time of publication, Robert Walberg neither owned nor controlled shares in any equities mentioned in this column.
|
