Dueling Fools
A Kodak Moment
April 7, 1999

Kodak Bear's Rebuttal
by Bill Barker ([email protected])

I guess the opening of baseball season has infected my fellow Fool's thinking here, because I'd be hard-pressed to imagine fatter softballs than what Paul's lobbed out over the plate for me to swing at. Let's play ball.

Kodak a Rule Maker? Just thinking about the concept induces a much bigger smile than I've ever managed to achieve by saying "Cheese!" Though Paul glosses over the Rule Maker requirement for a strong historical performance, I wonder if he's really looked at Kodak's history. They say a picture's worth a thousand words, and Kodak's ten-year performance graph certainly satisfies that cliche: it has got to be the ugliest graph of any present or past Dow component that isn't named Venator.

Paul states that Kodak qualifies as "super-sized," but my advice on that one is wait around a little while -- it'll change. Having shed more than a third of its sales over the last seven years, Kodak management is well on its way to getting the company down to wallet-size. Due to the oncoming shift to digital photography, Kodak's direction cannot possibly be said to exceed its location, and the location ain't all that promising in the first place. Nor does Kodak have the appropriate amount of cash on hand to qualify as a Rule Maker. On the whole, Kodak doesn't satisfy more than half of the Rule Maker qualifications.

Nevertheless Kodak is in the Rule Maker portfolio by virtue of qualifying as a Foolish Four stock when the Rule Maker made its Foolish Four purchase over a year ago. Oh, Kodak still qualifies as a Foolish Four stock, which isn't quite the way that strategy is ideally supposed to work. As a matter of fact, though this may not be the place to air this specific rant, I think Kodak stands as Exhibit A in every "the Foolish Four strategy isn't going to work so well anymore" argument. As I understand it, the strategy is premised on the belief that the Foolish Four companies are "unsinkable" and "temporarily beaten down." That's just not the case with Big Yellow. Kodak has been disappointing investors for a very long time, and the entire industry that Kodak is engaged in has a reasonably high probability of dwindling on a consistent basis from now on. I just don't think that betting on 12-month trades of such companies is likely to provide superior investment results.

Paul's best argument on behalf of Kodak is not when he tries to engage in air-brushing the company into a Rule Maker, but when he addresses the low P/E multiple that Kodak carries. Kodak is trading at about 15x trailing earnings, if you exclude certain "one-time charges" that is. But Kodak's long-term annual earnings growth is currently projected at only 5% by Merrill Lynch, and I don't think anyone can be confident that earnings will improve by even that much.

Given the way this all seems to be developing, I'd be reasonably sure that everybody can find prettier pictures out there than this one.

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