Kodak Holders Focus on $40 Target With Digital Sales

Julie Won, who helps manage $200 million at Hanson Investment Management, has endured ``snickers and giggles'' as a shareholder in Eastman Kodak Co., the camera and film maker struggling to remake itself into a digital- imaging company.

``It was a pretty dire story; we had some difficulty explaining our position to clients,'' said Burlington, Vermont- based Won. Her firm owns 66,197 Kodak shares. ``It's a painful turnaround, but they seem to be doing a good job with it.''

Kodak has climbed as much as 10 percent since Won started buying it in the third quarter of 2005, when the stock was trading as low as $20.95. She counts herself among investors who are banking on the stock to top $40 a share. Chief Executive Officer Antonio Perez's ``new Kodak'' posted back-to-back profits for the first time since 2004 as digital revenue more than doubled last quarter and the company amassed $1.85 billion in cash.

``They've been able to get out of the traditional business without too many terrible side effects,'' said Dublin-based Rory Flynn of AGF Management Ltd., who helps manage 3.67 million Kodak shares as part of its $55.1 billion under advisement. AGF had owned less than 500,000 shares up until the beginning of this year, according to Bloomberg data.

AGF is among eight of the top 20 investors that have added to their stake in the past two quarters as Rochester, New York- based Kodak hit a 52-week high of $30.20 in June. The shares dropped more than 10 percent in the two days after Perez announced third-quarter results as some investors sold on the good news and others focused on cash flow as a sign that the pain isn't over. Cash from operations fell to $1 million in the most recent quarter from $237 million a year earlier.

Digital Space

Kodak must still overcome concerns that the four-year restructuring plan is being hobbled by wider-than-expected losses on its new inkjet printers, a 2 percent operating margin last year that was one-ninth the average in the Standard & Poor's 500 Stock Index, and declining market share for its digital cameras.

The company's next step ``is to scale those businesses,'' Perez said on a Nov. 1 conference call. ``We have phenomenal properties in the digital space that have enormous possibilities for expansion.''

Perez, 62, plans to end the restructuring program by the end of next month. Kodak is counting on cameras that cost less than $200 and a new line of inkjet printers to drive digital- sales gains.

Kodak fell 8 cents to $23.07 at 4 p.m. in New York Stock Exchange composite trading and is down 11 percent this year.

Printer Sales

To further temper its declining film business, whose sales dropped 16 percent last quarter, Kodak is developing technology to enhance the quality of photos taken in low light and working with Motorola Inc. to improve cameras on mobile phones.

While Kodak's printers cost about $50 more than similar models from Hewlett-Packard Co. and Seiko Epson Corp., refill ink packages, including photo-quality paper, cost about 9 cents less per page, said Ron Glaz, program director with Framingham, Massachusetts-based research firm IDC.

Kodak projects sales of 500,000 inkjet printers this year and may introduce new models for 2008. That accounts for about 0.5 percent of the global photo printing market of 78.6 million units last year, Glaz said. Perez wants to have 10 percent of that pie by the end of the decade.

``I think they'll make the half-million,'' Glaz said. ``They're trying to shift consumer behavior and it takes a while for that behavior to change.''

Inkjet Costs

Costs tied to the introduction of Kodak's entry into the $55 billion inkjet printing market have been higher than the company expected. The losses may top $200 million this year and could widen next year, said Christopher Whitmore, an analyst with Deutsche Bank in San Francisco.

``The losses in inkjet could get bigger before they get smaller,'' he said in an interview. ``It's still very early but the initial costs appear to be pressuring cash flow.''

Concern that competition in the electronic-imaging market is too cutthroat has led some investors like Colin Symons of Pittsburgh-based Symons Capital Management to dump the stock. Digital margins, narrower than those in film to begin with, have faced pressure as Kodak struggles to control costs.

Perez plans to re-enter the market for cameras costing less than $200 to regain its No. 1 spot in U.S. digital sales. Kodak has 15 percent of the U.S. market and ranked third behind Canon Inc. and Sony Corp. in the past two quarters, according to IDC.

Promising Projects

``We're not confident that they're going to be able to command good margins because there's so many competitors,'' said Symons, who sold his 169,723 shares in July. ``They just became too risky.''

The company missed its initial restructuring target of boosting sales to $16 billion by 2006. Kodak posted $13.3 billion in sales last year.

Some shareholders say Perez has handled the turnaround well. Under the five-year tenure of predecessor Daniel Carp, the stock plunged 60 percent, compared with a 13 percent slip since Perez took over in June 2005.

``He's kept them from making a bunch of mistakes,'' said Christopher Zook, chairman and chief investment officer at CAZ Investment. The Houston firm owns 226,828 Kodak shares and has held the stock since at least 2005. ``He hasn't chased projects that are speculative. He's gone after more economically viable and high visibility projects that have a higher probability of succeeding.''

Perez may be looking to reward shareholder patience with its first buyback since March 2001. On the company's third- quarter conference call, he said Kodak would decide how to use the $1.85 billion in cash on the balance sheet by February's investor conference. Zook and other investors would rather that money be used to ensure a lasting turnaround.

Once Perez can accomplish that, Zook said the stock will ``move from the 20s to the 40s so fast your head will spin.''
(Source bloomberg.com)