Andrew:
I think "cautiously optimistic" would sum up the way I feel about EK as well. I am tempted to buy more at current prices, but the market really doesn't favour the company right now. I suspect it will continue to languish at these low levels for a few more months before starting to climb back up again. So I might hold onto my money a little while longer.
I have to agree with both you and Nero that further short term declines are still possible, but I expect it is unlikely unless the entire market corrects, in which case all stocks become cheaper. Kodak has already plummeted twice in the last couple of months and by now it must have reached a level the market feels comfortable with.
I like what you said about free cash flow. It's one of the things I look at too. I also measure EVA generated, and I have modified the methodology to compare EVA generated relative to share price i.e. how much EVA do you buy for each $1 invested in the stock, relative to other companies. In my analysis, Kodak fares pretty well, showing steady year on year improvements, which is a feat that by far not all blue chip companies can boast of, and when they can, they tend to trade at far higher share prices.
But the problem everybody is grappling with, is: how does this translate into future earnings growth? Everybody is looking very hard at the future of digital photography. Personally, I can't imagine digital photography not taking off, but I'm struggling to determine just how material it is in the short to medium term.
According to the last earnings announcement, earnings are expected to be flat due to higher losses for digital products, but also due to the impact of competitive pressures in film and paper, the strong dollar and aggressive and expensive marketing of Advantix. What I would like to know is, just how significant are these last factors relative to the digital products?
I found the following quote in the 1996 annual report: "Perhaps more than any other product, we expect our Advantix system to contribute substantially to Kodak's long-term growth. Ultimately, the Advantix system will lead to more pictures being taken, enlarged, reprited and shared by consumers anywhere." I guess it hasn't quite taken off yet, although Fisher did state that consumer satisfaction is high.
Also, Commercial Imaging is quite significant to the bottom line. Although it is far less profitable and growth is quite low, revenues in this division actually exceed those of Consumer Imaging. Do you know how steady market share is for professional imaging systems, and what growth prospects are like?
The company doesn't seem to be very good at putting all these different factors in perspective - maybe that is intentional, but it doesn't help shareholders get to the bottom line very easily. What I am seeing though, is a pretty diversified company with management who feels comfortable that earnings eventually will improve. I don't think the market recognizes this.
The market is very quick to punish companies that don't generate spectacular growth, but I at the same time I see it richly rewarding many companies with fundamentals that don't support (in my opinion) their high valuations.
Going forward, I feel quite comfortable holding onto Eastman Kodak, which is supported by strong financial performance, a P/E ratio of 17, a well-thought of CEO and I have little doubt that we will see steady medium to long term growth. If it does falter along the way, at least it's not likely to crash and never recover, as will some of the many momentum companies with earnings in the pennies but price-multiples that make you wonder if you're missing something in your analysis. Those are the ones I would be shorting right now, not Kodak.
Philippa |
