The Daily Dow
Thursday, September 18, 1997
by Deborah Tidwell (TMF Debit)
ALEXANDRIA, VA (Sept. 18, 1997) --Well, I'm back to try this nightly recap thing again. Today was not as kind in the Hot News About Dow Stocks department. On Tuesday, EASTMAN KODAK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EK)") else Response.Write("(NYSE: EK)") end if %> announced that it would miss earnings estimates again. Today, we got nada, zip, zero, bupkis.
Since Eastman Kodak is now likely going to be sitting in the Foolish Four picks for awhile, I thought it would be worthwhile to revisit it as an investment. While the Philip Morris debate is based largely on moral issues, Kodak presents a "future outlook" dilemma. (I noticed that they are discussing the Kodak earnings announcement on the Eastman Kodak message board. Please join that discussion with your own thoughts on the matter.)
I thought a little more about Kodak's prospects because the reason, in theory, that the Foolish Four and Beat the Dow approaches offer market-beating returns over time is that you are buying high-quality companies experiencing stock price declines due to short-term problems or, in the case of Philip Morris, a stock split. There are cases, however, where the stock price is low for a good reason and may not represent a good "value." Is that the case with Eastman Kodak?
Kodak's core imaging business is a classic "razor and blade" model where the money is made by selling the consumables -- in this case, film -- used by the imaging equipment. Silver-halide film photography has been a standard for over 100 years, but is slowly becoming obsolete due to the development (pardon the pun) of digital technology. Publishing went "digital" starting around 1990, going from paper-board layouts that were photographed to produce film for presses to computer pre-press production. Think of it as the difference between using a typewriter, envelope, and stamp for correspondence versus a word processor and email.
Photography has been slower to transition for several reasons. The technology for digital cameras -- to give them more functionality and to improve the consistency and quality of the images produced -- is still evolving. There is also a huge, established infrastructure supporting standard photographic processes. But, the cost savings of digital photography are substantial and that is pushing the transition forward. Most people agree that it's only a matter of time before traditional photography is reduced to a "craft" -- especially commercial photography. It may be awhile before the consumer market goes digital because there is no compelling force yet, beyond the ability to email a photograph to someone.
The problem, in Kodak's case, is that the transition from film to digital is not the only transition they face. It also faces the transition from high-margin consumable products to thin-margin digital storage and equipment products. On the storage side, with rewriteable CD-ROMs, it is experiencing sharp drops in prices akin to what we saw in the DRAM market last year -- and for the same reason too: increased manufacturing capacity and a resulting imbalance in the supply/demand ratio. Kodak's manufacturing is largely U.S.-based, which makes it increasingly hard for it to compete when things like that happen. Kodak has released a new digital camera and, in partnership with Motorola, has developed technology that reduces the cost of adding features to digital cameras and imaging equipment. It has a huge R&D center, in fact, and is attempting to identify promising projects for partnerships with other companies whereby they share the development costs and the rewards.
I think Kodak's assessment that its film-based revenues will be around for awhile is sound. My biggest question is how it will maintain its 10% earnings growth over time when the consumables related to digital products do not have the same high margins it is used to with its traditional businesses.
Tomorrow, our guest writer will be Jerry Thomas (TMF Cheeze).
(c) Copyright 1997, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool. ________________________________
Stock Change Last -------------------- T -1 1/16 43.69 GM - 1/2 68.38 CHV - 7/16 86.63 MMM + 7/16 89.00
Rec'd # Security In At Now Change
1/2/97 153 Chevron 65.00 88.50 36.15%
1/2/97 179 Gen. Motor 55.75 68.69 23.21%
1/2/97 479 AT&T 41.75 44.19 5.84%
1/2/97 120 3M 83.00 87.50 5.42%
Rec'd # Security In At Value Change
1/2/97 153 Chevron 9945.00 13540.50 $3595.50
1/2/97 179 Gen. Motor 9979.25 12295.06 $2315.81
1/2/97 479 AT&T 19998.25 21165.81 $1167.56
1/2/97 120 3M 9960.00 10500.00 $540.00
CASH $1009.44
TOTAL $58510.82