I nominated Eastman Kodak and it won the Worst Stock of 2010 contest, so the company rewarded me by posting fourth-quarter earnings that seemed to show a remarkable resilience: revenues up year over year, profits where once there were losses, and a stock price that went up 25% higher on the news. My Foolish colleague Anders Bylund tweaked me by suggesting rumors of Kodak's death had been greatly exaggerated.
A snapshot in time
Yet let's go through what Kodak really said in its earnings release. Its biggest revenue component -- consumer digital products including cameras, printers, picture frames, and intellectual property royalties -- grew 26.5% from last year. "Our momentum is returning," said CEO Antonio Perez, "our strategy is paying off."
Um, what strategy would that be? The one where one-time cash infusions keep the company going? The $254 million gain in revenues was driven by increases in non-recurring intellectual property royalty revenues and favorable foreign-exchange rates. Volumes for what the company is actually selling were down.
This intellectual property revenue had a large impact on the segment's gross profit last quarter. Not exactly a sustainable business model that can effectively compete against Hewlett-Packard (NYSE: HPQ ) , even if printers and ink cartridges got a boost. Take out the one-time items, and segment earnings were about 85% less.
Nothing under development
Kodak's legacy film business continues to dwindle as well, with revenues falling 10% even as earnings improved, though the gains had more to do with cost-cutting and more of those currency-exchange contributions. Traditional photofinishing sales fell 13% and film capture dropped 17% for the fourth quarter, while volumes fell because Kodak closed its Qualex labs. Also, the graphic communications division experienced a 5% decline in sales.
LEDing down the rat hole
Incredibly, the one thing the company had going for it is now gone. Kodak was able to complete the last-minute sale of its OLED business to South Korea's LG, getting the revenues in just before the end of the quarter. It was the one hope it had of actually resurrecting itself.
The company created the first viable OLED materials back in the 1970s, but never did much with it beyond some pretty cool picture frames. Kodak certainly seemed a lot more committed to the technology when it was awarded a $1.7 million Department of Energy contract last year. While Kodak noted it still has access to the technology, it seems to be getting out of OLED just as the technology is taking off.
Smartphones from Google (Nasdaq: GOOG ) and Nokia (NYSE: NOK ) are coming to market with OLED displays, Microsoft's (Nasdaq: MSFT ) Zune HD recently hit the street featuring an OLED screen, and the new Walkman from Sony (NYSE: SNE ) will use the technology, too. Maybe Kodak just wasn't sure if it could compete against Universal Display (Nasdaq: PANL ) in providing the necessary goods.
Whatever the reason, Kodak remains a picture of a company in contraction, not expansion. Where will the future growth come from? Recent quarterly results notwithstanding, the filmmaker is a sepia-toned reflection of a once-glorious past that one-time revenue gains can't overcome. With the big jump in the share price, investors should get the picture that it's time to bury this stock for good.