Is Kodak Ready?

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Eastman Kodak (NYSE: EK) received an FDA approvable letter (a precursor to marketing approval) for its new mammogram device, moving one step closer to marketing the computer-aided detection (CAD) technology acquired in September from MiraMedica.

Is Kodak's strategy to spend $3 billion by 2006 on new products and acquisitions starting to bear fruit?

Mammography equipment sales are projected to grow from $530 million in 2002 to $1.1 billion in 2007. To compete, you absolutely have to have CAD.

Kodak's clinical trials showed that 39% of missed breast cancers might have been detected almost 15 months earlier if Kodak's new CAD device had been used. That's promising.

The pioneer in the field, with over 1,000 installed systems, is privately held R2 Technology, whose clients include GE's (NYSE: GE) giant GE Medical group and women's healthcare company Hologic (Nasdaq: HOLX). The promise of CAD in diagnostics is reflected in R2's recent announcement that it has installed the world's first lung CAD system.

Kodak thinks CAD is ready to grow in all areas of imaging. The question for investors is can Kodak displace established market leaders and enter new markets early? Until Kodak gets FDA approval and sales on the books, its CAD success will hard to measure.

Kodak has paid a high price for high growth. In October, Kodak paid $468 million for PracticeWorks -- a dental company with quarterly sales of $46.5 million and net income of $5.9 million. The question here is whether PracticeWorks can grow rapidly, and profitably, enough to justify that price. We'll get some answers during the next two quarters.

Both CAD and PracticeWorks will reside in the $2.2 billion Kodak Health Imaging Group. Last quarter sales were up a modest 1%, but with profits of $117 million, it has the strongest margins within Kodak. It is the right place to make investments.

Kodak needs to succeed. Acquisitions must be nurtured. The combination of need, high margins, and high-growth acquisitions, looks promising. If next quarter's cash flow increases, and PracticeWorks grows strongly, the time may be right to buy Kodak again.

W.D. Crotty owns stock in Eastman Kodak -- but has been a skeptic of the high priced acquisitions. You can reach him at wdcrotty@fool.com.

Our Eastman Kodak discussion board has been all over the new strategy. Would a business school class just milk this cash cow? What Would Warren Buffett do (WWWBD)? Add you two cents.