This Duel seems to have brought out a poetic quality in my colleague Dave, as he begins his rebuttal with the assertion that Kodak is murky, uncertain territory for which investors -- with great hardship -- squint out a future. Where Dave sees a horizon in shades of gray, however, I see black skies and white jags of lightning that investors can spot from miles away.
Dave rightly points out that wherever photography is headed, Kodak is "technologically positioned to benefit from almost every eventuality." That's all fine and good, but let me drop some names of other companies that had sweet technology and could not survive poor strategy and management, or savvier competition: Atari. Iomega (NYSE: IOM). Xerox (NYSE: XRX). Polaroid (NYSE: PRD). I'm sure investors in these companies sleep well at night knowing that, although they've lost a bundle, their companies were "technologically positioned for almost every eventuality."
Kodak's management has shown continued ineptitude with its failure to stimulate growth and aggressively cut costs throughout the '90s, its slow reaction to competition and lost market share, and its botched product introductions, such as the largely unsuccessful $100 million launch of Advantix.
Next, Dave talks about Kodak's ability to grow sales in the Health Imaging and Other Imaging segments, and the company's positive cash flow generation. But as I mentioned earlier, the units where Kodak is gaining a bit of momentum are much lower-margin businesses than its consumer products businesses. Operating efficiency does show signs of improvement, but not enough to make up for the fact that consumer products are three times as profitable as Kodak's other segments.
And let's take a closer look at Dave's claim that Kodak has demonstrated such efficiency by cutting SGA costs relative to its revenue decline over the past four years. While it's true that these costs have been impressively and aggressively curbed in that time period, the bulk of these reductions happened in 1997 and 1998, and the rate of the cuts has slowed considerably since then.
In fact, for the six months ended June 30, 2001, SGA costs are actually up slightly year over year, suggesting that Kodak has pared all the operating fat it can from its business. Gross profits, meanwhile, continue to drop, and with interest expenses up 50% in the first half of 2001, Kodak's got pressure from both sides. The bummer economy doesn't help, as it's no time to exert pricing pressure or introduce expensive, techy products.
Finally, Dave is probably right when he says he's more sentimental than I am. One of the most common and deadly mistakes we can make as investors is to execute buy and sell decisions largely with our emotions. (Trust me, I used to live in one of Webvan's beta cities, and the mere sight of those cute Claymation-like vans trundling around suburbia nearly compelled me to buy that disastrous stock.)
So don't go soft-brained at the sight of those little yellow boxes, those aging pictures of your long-lost love. She was no good for you -- and neither is Kodak.
Josie Raney is not so impressed with the Kodak of recent years, but thinks it's pretty nifty that in 1999 the company became the first to open a chain store in Antarctica. The Motley Fool is investors writing for investors.
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