Eastman Kodak Traps the Bulls

by StockJockey

Thursday, May 01, 2008 - 11:58 am

Originally Published In the News May 1, 2008 11:58 AM
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Eastman Kodak (EK-NYSE) has not treated its shareholders very well over the past few years. And today is no exception:

Eastman Kodak Co posted a bigger-than-expected quarterly loss on Thursday as higher silver and aluminum costs and increased spending on its inkjet printer business weighed on margins.

Analyst Shannon Cross called the margins “the lowest level seen historically” and noted that commodity prices played a large part, particularly at Kodak’s commercial printing unit, which reported an operating loss of $1 million even as sales rose 4 percent.

“Their commercial print business ... has never had a loss—that was supposed to be one of the crown jewels,” she said. “Its commodities (that hurt it) and investment in their new inkjet business, and they weren’t able to offset it.”

The raw materials are used in the making of such Kodak products as traditional film and plates for commercial printers. Reuters

The company might finally get a little relief on the commodity front, and the stock is holding its old 52-week lows for the time being. But this stock continues to be a thorn in Bill Miller’s side, and for now it epitomizes the definition of a value trap.

Value Trap- A stock that has experienced a large price depreciation and is mistaken to be a value stock.

Miller’s thesis in Kodak sounded good, but the stock was much higher when he laid it out roughly 10 months ago in Kiplinger’s.

Is your case based on Kodak’s entry into the inkjet-printer business? The new printer business is part of the thesis, which is that Kodak has introduced a technology that has the potential to disrupt the entire industry because it will be able to charge a lot less for ink cartridges—about half the current price.

What’s the rest of the thesis? It’s simple. Throughout this entire transition, during which sales from film have dropped by almost two-thirds, Kodak has continued to generate about $1 billion in free cash flow before restructuring charges. That’s because as film sales have dropped, its graphic-communications and digital businesses have improved. Investors today are valuing $1 billion of free cash flow at $14 billion to $15 billion in the marketplace. But Kodak’s market value is just $6 billion. Why is it so low? Because for each of the past four or five years, Kodak had cash restructuring costs—for environmental-cleanup liabilities, for the costs of closing plants, for severance when there were layoffs—that have totaled roughly $600 million to $700 million per year at the peak. There will be $500 million to $600 million in additional restructuring charges this year related to closing film plants and the sale of Kodak’s health-care business. Next year, there will be no restructuring charges. Unless the business gets a lot worse in the next year or so, Kodak will do $1 billion to $1.2 billion of free cash flow in 2008. And if that happens, the stock should be up 50% to 100% in that period of time.

Kodak posts wider-than-expected quarterly loss
Reuters