Interesting interview with fund manager in this weeks barron's. Here's the part about Kodak.
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Q: What else excites you here?
A: At the other end of the spectrum, a company that we think is really attractive is one that has underperformed the market for about as far back as the eye can see. That's Eastman Kodak. If you were to ask your readers to name a company that dominates its industry, that has 20% operating margins, 10% net margins, earns 30% on equity, 20% on total invested capital, generates $1 billion of free cash flow and trades under 10 times trailing earnings, I bet nobody would get it, but that's Kodak.
Q: So it's not going out of business?
A: It is not going out of business. Kodak reminds me a lot of IBM in 1993-94 when Louis Gerstner came in. You have a dominant company whose most profitable business is under attack from new technology. Then it was IBM's mainframe business, here it's Kodak's conventional film business. They are a major player, though, in the new technologies, No. 2 or 3 behind Sony and or Olympus in the digital-camera area, which we happen to believe is a great and growing area. Nobody is making any money in it, including Sony. As that industry shakes out, ultimately you will make money in it. If it becomes a service-centric business, as it looks like it may, then the potential for margins and additional free cash flow generation at Kodak goes up very significantly.
Q: What about the film business?
A: Evidence is emerging that the conventional film business and the digital business are co-existing. It is not that one is going to eliminate the other. They are different processes. They are stored differently. They are used differently. People are using both. The market for conventional film photography is huge globally. It is just in the U.S. and the more developed markets that the changeover to digital is happening more rapidly. Conventional film sales are growing, they are not shrinking. In the fourth quarter of last year, they were about flat, and that's the first time they have been flat in a long time. Film units in the last few years have been growing about 3% to 4% a year. Digital penetration is about 7% to 10% . It is very, very small compared to conventional but it is growing rapidly. An area such as motion pictures will probably convert to digital fairly quickly. Digital is making rapid inroads into medical. But, the main point is the market right now is pricing this incredibly profitable and dominant company as though it is going to go out of business. We expect this company will generate about 60% of its total current enterprise value in free cash over the next four to five years.
Q: And management?
A: One of the things that attracted us to Kodak is Dan Carp, who has a marketing background and an international background. They have a really good management team. It is one that we have as much confidence in to run the business in a sensible long-term way as about any management of any company we own. They are very honest. They are very straightforward. They are very open. They look at all alternatives. They allocate capital sensibly. I can't think of much that they've done wrong. People were after them a year or two ago, pressing them to be more aggressive in digital. Kodak's position in digital is very strong and they are spending money in it, but they are doing it in a very measured and realistic way.
Q: When do you expect an upturn in revenue growth?
A: This company has very good financial controls and was among the very first companies to talk about the slowdown in the economy. In September, they warned on the quarter. It is encouraging to me that Kodak has not now lowered guidance again. They took a very conservative posture going into this year. They may have to lower guidance again, we don't really know. But Kodak will be a fairly good early indicator of when the economy starts back up again on a broad basis. They are very much a mass-market consumer company sensitive to changes in consumer spending. Fed Governor Poole said recently the economy is growing about 1% and he expects it to accelerate in the second half to 3% to 4% next year. If that's the case, Kodak's revenue growth will accelerate right along with that and the valuation won't be 8.5 times the next 12 months' earnings as it is right now. |
