Eastman Kodak (NYSE: EK ) was supposed to be the worst stock to own in 2010, according to our readers. I guess the company never got that memo. The stock has beaten the overall market by nearly 20% since we foretold Kodak's demise.
The death rattle might still be heard in our lifetime, though. Kodak's second-quarter results were hardly inspiring, however you look at them. Sales dropped 11% year over year, to $1.57 billion, led by a 21% sales slump in the traditional film, photofinishing, and entertainment division. That's bad, but hardly a surprise; film cameras are so dead that Polaroid doesn't even make insta-shot film anymore.
Here comes the ugly
What's worse is how Kodak's weakness is distributed. If Kodak's operations were a three-legged stool, all three legs would be infested with various breeds of termites. You've seen the old-school photo segment's declining sales, but at least that division is still somewhat profitable. Sales in the graphic communications group, where you'll find printers, ink, and scanners, fell 2%, to $656 million, and improved from a loss to break-even. And the supposed savior of the company, the digital imaging segment, saw sales dwindle by 11%, to $447 million, while reporting a sizable operating loss. That's right -- Kodak's digital division is the smallest segment of the company, and the only one that's losing money.
CEO Antonio Perez had to dig deep to find some positive points around which to spin this quarter: "Digital commercial printing revenue grew 9% in the second quarter, consumer inkjet printer and ink revenue grew 50%, and operating margins improved in the majority of our digital product lines and for our digital business in total." This is true, but only if you cherry-pick your data points with utmost care.
I'm afraid that Kodak has bitten off more than it can chew in the digital imaging space. It's up against entrenched market leaders including Hewlett-Packard (NYSE: HPQ ) and Canon (NYSE: CAJ ) in the market for consumer-level printers and supplies, and HP and Xerox (NYSE: XRX ) in the corporate space. Kodak is also under intense pressure as devices converge. Gadgets from Apple (Nasdaq: AAPL ) , Motorola (NYSE: MOT ) , Canon, and Cisco Systems (Nasdaq: CSCO ) all tout their digital still and video cameras.
When every phone has a halfway decent camera built-in, you really have to blow the customer away to sell a pure-play digital camera. While I do hear good things about Kodak's camera products, that positive buzz doesn't seem to be enough to drive either sales or profits.
Do this, not that
If I ran Kodak, I'd have some hard choices to make:
- The film-based division may be profitable today, but it's waning rapidly. Sell it to the highest bidder before it becomes a worthless asset portfolio.
- Integrate the printing division with the imaging business, in order to bind the two halves of the imaging experience into a cohesive whole from the end user's perspective.
- Split the company into two new divisions: consumer and enterprise operations. A third segment would manage assets that are valuable to both halves, such as technology R&D and patent management.
You'd end up with a leaner, meaner Kodak that could focus on consumer and corporate opportunities with wholehearted abandon, while making effective use of what still is an impressive set of technology assets.
Who am I kidding?
I'm not holding my breath while waiting for Kodak to do any of this, of course -- it's just unsolicited advice from another disinterested analyst with no personal stake in the future of Kodak. Short of this plan -- or another one where the disregard for tradition is just as ruthless, and the company-changing scope just as audacious -- Kodak will continue to sink into the mire of everyone else's digital imaging solutions.
Is Kodak the worst stock of 2010 so far? Heck, no. Could the prophecy still be true by the end of December? Perhaps, and certainly in another couple of years.
It's time to change the composition of this Kodak picture. Who's with me? Share your visions of the company's future in the comments below.
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