Philippa,
My interest in EK has been growing the more the stock has fallen. I consider it
reasonably cheap based on 1996's free cash flow. Reading through this thread,
I was getting ready to spring to Fisher's defence, but you beat me to it. Nero
seemed quite surprised when he saw your numbers.
Nero:
you were being very negative about Fisher's performance, but you
only seemed to base that (explicitly) on the stock's performance and the
latest quarter. Do you have fundamental data trends similar to Philippa's that
you feel back up your earlier remarks? I've only seen improvements, but
perhaps I'm only trying to see improvements... <g>
I realize that this quarter was disappointing, but there were some pretty good
reasons I thought. Obviously digital photography hasn't exactly set the
world on fire yet, but Kodak has made some huge investments positioning
itself in that market. Obviously the combination of the two will yield some
pretty bad earnings reports. I think the important things to focus on are: How well
are they positioned? Will digital photography become popular enough for this
good position to matter? Can they make a profit at it if both of the above work
out? Will explosive growth in digital photography cannibalize EK's analog
profits, or complement them? If it cuts into them, can they grab enough digital
market share to make up for it? What will their high margin consumer product be? - I think now they depend on the great margins provided by film and photographic paper - digital cameras? I doubt it - look at cellular phones. They
will want to provide stuff that people repeatably buy (like analog film today).
Perhaps paper to print photos on at home? Requires a lot of hardware. Imaging
software? That market seems well represented already (ie MSFT). Are there
plug-in cartridges for these cameras? - probably only need a couple at most.
Maybe they want people to buy their writable CD's to make portable digital photo albums...now there's something! Probably very high margin, but still low
volume. Any ideas anyone? This is what I'm trying to figure out.
That's assuming digital photography takes off. What if it doesn't? Can
they continue to dominate analog photography? Fuji seems to be making
inroads in the US market, while Kodak is effectively shut out of Japan's
enormous consumer market. If EK can hold it's own (and maintain pricing power)
on it's home turf, while finding a way to break into the Japanese market, perhaps
digital photography's absence wouldn't hurt them.
As for Fisher's performance, there are some strong positives:
1) Now basically debt-free
2) Earnings much improved from 93 and before
3) Excellent return on equity
4) Gross margins inching upward
5) Company buying back (cheap IMHO) stock
I've read about the disarray the company was wallowing in before he arrived.
It sounds to me like he moved swiftly to make real change - he got rid of
the extraneous operations to focus on the core business. In fact, it seems that
EK had diversified to escape the photography business in fear that digital photography would render them irrelevant. Seems to me that his
biggest accomplishment has been to banish that type of thinking - getting
the company to see digital as an opportunity rather than a threat. By jumping in
with both feet, perhaps they're ahead of the curve, suffering short term setbacks,
but positioning themselves to lead the industry into the future.
I think he has reduced some of the bloat, but admits that there still needs to
be progress made in that area. I really don't believe that three years is enough
to completely turn around a massive company. I think EK was like 1987 vintage
IBM in 1993, not now. Look how long it took Gerstner to turn IBM around. And
he's certainly can't claim to be finished yet!
In summary, I'm impressed with the developments, unfazed by short term challenges and cautiously optimistic about the future. If I can find a good
argument that Kodak can profit in a digital world, I'll buy at these prices for sure!
Any comments?
Regards,
Andrew |
