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September 15, 1998

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Subject: 2 short?
Author: shakestheclown

mykidsmom has looked for thoughts on whether it's time to step on EK with a short, and has a host of analytical tools she's using to do the digging.

However, EK is a "turnaround" investment. The Fool 4 plays that approach to it and Peter Lynch would call it the same. Plugging it into an historical, analytical model will produce distorted, often misleading results becuase that's were all the problems for a successful turnaround are, the past. The money is ahead.

EK's price jumped on Q2 earnings, and stayed up for two primary reasons: (1) Q2 showed core, film market share had stabilized against Fuji, after many consecutive, declining quarters (an overall decline from 74% to 65%); (2) EK demonstrated that thier cost control program was highly effective and absolutely for real. High octane fuel for a "turnaround's" stock price.

EK also made it plain that they had suffered in Q1 and Q2 due to foreign exchange losses in Asia (and posted the good results nonetheless). CEO Fisher stated he was going to explore currency hedges to dampen this effect. The dollar/yen exchange is not news to EK or its recent earnings results.

Q3 earnings and the response of EK's price, will follow the success or failure of their ability to keep core film market share stable (or rising), without a correlating revenue decline due to price war discounts, and continued demonstration that the cost reduction program remains steady and robust.

If you believe that these two fundamentals will falter in Q3 - EK is a definite short. If you believe the company understands those issues as its problem, and has the recipe for them - EK will be a painful short.

This is the input I would use to assess an EK short, in the near term. Using that other stuff on "turnarounds" would be similar to picking the Denver Broncos to lose the January '98 Super Bowl because they play in the AFC and had lost every time they were there in the past.

Vegas stuff.


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