Eastman Kodak: Bargain Buy or Value Trap?

To really understand a stock, you just have to get down and dirty, break out your pencil, and really weigh the risk-versus-reward potential of the company you're following. I propose we take a closer look at the good and the bad at Eastman Kodak (NYSE: EK  ) , to see whether the stock is a good value or a potential money pit.

The good
I know what you're thinking and yes, there really are good points to be made for Eastman Kodak. For instance, inkjet printers are now Eastman Kodak's bread-and-butter business, and growth in that segment appears to be gaining momentum. Eastman has been going toe-to-toe with Lexmark (NYSE: LXK  ) and Hewlett-Packard (NYSE: HPQ  ) , emerging with 23% commercial and 26% consumer growth in its inkjet business based on its most recent quarterly report.

Perhaps Eastman Kodak's truest wild card lies in its intellectual property value. Eastman Kodak recently struck deals to cross-license its technology with Samsung and LG Electronics. It's also pursuing patent litigation against Apple and Research In Motion (Nasdaq: RIMM  ) for the use of its photography technology in smartphones. Revenue from intellectual property pacts could be sizable, but unfortunately, many of these disputes still remain unresolved, and future cash flow is hard to predict.

The bad
Eastman Kodak keeps holding onto the notion that the world is flat and traditional film is still a profitable business. Its failure to innovate and integrate digital technology into its arsenal of products in a timely manner has left it way behind the curve. Competitors Canon (NYSE: CAJ  ) and Sony (NYSE: SNY  ) have left Eastman Kodak in the dust, resulting in full-year losses in four of the past five years.

The future of Eastman Kodak's pension fund presents an even more disturbing problem. As if $1.25 billion in debt were not enough to worry about, fellow Fool Rich Duprey reminds us that low interest rates and unrealistic investment return expectations could result in more than a $1 billion pension shortfall. Although Eastman is generating positive free cash flow over the last four quarters, it's nowhere near enough to make a dent in these figures.

The takeaway
Eastman Kodak's valuation essentially boils down to one question: What is the Kodak name worth, in relation to a lagging business model and the potential of intellectual property pacts in the future? I still feel there's value left in its brand recognition, and however tedious they might be, patent infringement cases have thus far tended to end in Kodak's favor. This stock is by no means a slam dunk; its ongoing turnaround may never materialize. But after reviewing its potential, I'm going to change course and admit that Eastman Kodak may yet have a few tricks up its sleeve.

Do you have an opinion on any of the companies mentioned above? Let's hear about it in the comments section!

Fool contributor Sean Williams does not own shares in any companies mentioned in this article. He tried really hard to refrain from using the phrase "company snapshot" in this article. You can follow him on CAPS under the screen name TMFUltraLong. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy which is never out of focus.


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  • Report this Comment On January 24, 2011, at 2:24 PM, khaledmrd wrote:

    I Kodak come back Story will be Huge.

    Csmeras is a small part of New Kodak, Camera will always be around as smartphone is slim and can't have a reasonable 3X-5X Optical lens,

    They just transformed in Last 5 years from Film to Digital, Kodak Kiosks, Kodak Digital solution Express stores, Kodak Brilliant Social Networks Cameras and Digital Frames & Camcorders with one touch share to top sites Across the World like Facebook, Twitter, Youtube, Kodak Gallery and even New Russian and Chinese, Also Digital Printing Photo Albums and many more.

    Growing fast in Digital not even in US and Europe but Tier 2 & 3 in China and India and moving many R&D & production Facilities in Asia

    their Software division is growing with many Consumer and B2N commercial and Gov. & Enterprise.

    Their Biggest Game Changer is in Digital Ink Jet technology in Consumer

    their Unique Oil and Wifi All in oNe printers with Printing cost saving due to their own Ink Tech,. and Head of the Cartridge in the Printer and not in the Cartridge which means cheaper consumables, AROUND 10 NEW MODELS WILL BE LAUNCHED AFTER HP, Epson, canon,their Paper technology is big and they just announced the lated in Commercial and Professional paper including in 2011 HD Paper.

    Their Commercial side is a Story by itself after they acquired many companies across the Globe, they now coming with latest breakthrough in Commercial and Packaging Digital complete systems including Work Flow Software System , Printers for many spaces and even Dimensional 3D Printing and Stream printing , even top players distribute in 2011 their new products.

    More innovation announced in Sensors technology, material science and 2D/3D Laser Projection and many been hinted about.

    Their Patents Generating 100s of million every year and they Expected more to come as hinted during the last CC, not just Photography or cameras patents but Inkjet, Touch Screen, Online services, communication, OLED, 3D and many more

    their outlook is Profit in the 2010 due to the come back in the Dec. Qtr. and Cash ~1.8-2B

  • Report this Comment On January 24, 2011, at 7:54 PM, rjriley5000 wrote:

    I believe that the author is underestimating the value of Kodak's patents.

    It is a fact that developed countries cannot compete with low wage countries and have a decent profit margin without patents. Kodak and every other invention based companies are entitled to receive the full value of their inventions.

    Unfortunately, we have far too many large transnational patent pirating asset thieves. They are stealing on the grandest of scales and in the process impoverishing all Americans.

    These companies are spending a great deal of money trying to cover their tracks with stories of mythical patent trolls. It is a fact that those so called trolls are the only salvation for America's economy. Without inventors American business cannot generate he kinds of profits needed to support our standard of living.

    Ronald J. Riley,

    President - www.PIAUSA.org - RJR at PIAUSA.org

    Other Affiliations:

    Executive Director - www.InventorEd.org - RJR at InvEd.org

    Senior Fellow - www.PatentPolicy.org

    President - Alliance for American Innovation

    Caretaker of Intellectual Property Creators on behalf of deceased founder Paul Heckel

    Washington, DC

    Direct (202) 318-1595 - 9 am to 9 pm EST.

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