Out of the Dark Room – Kodak Looks to Fully Develop
Eastman Kodak (EK) the formerly iconic America company and Dow component has hit a serious rough patch. The camera and film maker missed the boat on the digital imaging revolution, and the company has been playing catch-up ever since. The stock has reflected this lack of foresight in the evolving imaging marketplace by steadily declining over the better part of a decade. Products that had made Kodak successful in the past such as film became nearly obsolete very rapidly and Kodak management was slow to recognize the peril. The recent weakness in the stock—it has lost nearly half its value in 2008—has depressed the price to such a degree that we now see opportunity. Particularly since Kodak announced today that it will use a $1 billion IRS tax refund from the 1993-1998 tax years to buy back nearly a quarter of its outstanding shares at a market price that is just above book value.
Unfortunately for Kodak, it is not the major player in the digital photography market that it had been for “traditional” film. A touch late to the party, the company announced in 2003 that it was switching its focus to digital, but EK still trails industry leaders Canon (CAJ) and Sony (SNE). The company does make digital cameras, camera accessories, printers and ink and according to technology blog is rumored to have partnered with Motorola (MOT) in designing a 5 MP camera phone. Kodak CEO Antonio Perez was quoted on what differentiates the MOT and EK combined product from camera phones currently available, “What you have [now] is a cell phone that was designed to be a cell phone, and then they drill a hole in the side and put a sensor in and they say, now you have a cell cam [cell phone?]. What you’re going to see, starting next year, is a co-designed Motorola/Kodak multifunctional device that has been designed from the beginning to be a phenomenal phone and from the beginning to be a phenomenal camera.”
Perhaps Kodak has finally found its edge in the digital era, if it can truly make a cell phone camera that is comparable to stand alone digital cameras. That could be a decent revenue boost but the cell phone/gadget space is extremely competitive. The products and patents that Kodak has may not bring it to the prominence it once enjoyed but at least it is an improvement over the innovative stagnancy of the past few years. Kodak will need to continue to innovate, as its old business model is all but obsolete.
However, the company still has some strengths—such as in digital printing. From a value- investing perspective it is hard not to be intrigued by the underlying value in Eastman Kodak. Compared to historical norms a price-to-sales of.35 is half of what we would expect. Furthermore, price-to-cash flow is only 3.73 currently whereas EK’s historically normal range is 10.9 to 18.4. Even after today’s 15% gain after the buyback announcement the price-earnings ratio is under 6. Clearly, these valuation ratios are well below where they have normally been for Kodak and management thinks the company is undervalued as evidenced by the buyback. Quoting Perez, “Our board’s decision to authorize this repurchase initiative underscores the rising confidence we have in Kodak’s product portfolio, in our current financial position and in the execution of our strategy.”
Ockham Research Staff @ June 24, 2008
