Kodak Shutters Digital Cameras

After more than a century of making its own cameras, Eastman Kodak (NYSE:EK) has focused on a new strategy to develop profits: outsourcing the manufacture of its digital cameras. In a deal for an undisclosed sum of money, the venerable film and camera maker will pass off those operations to Flextronics (NASDAQ:FLEX), along with 550 jobs.

Flextronics is a design and electronics manufacturer for companies like Xerox (NYSE:XRX), for which it produces copiers. It also makes printers, computer screens, and cell phones. It will acquire not only Kodak's entire manufacturing operations, including assembly, production, and testing, but also Kodak's Japanese Digital Product Center and its Chinese Electronics Products facilities. Kodak will maintain its patents and intellectual portfolio, and maintain control over the look and feel of Kodak products.

Outsourcing the manufacture of its digital cameras will allow Kodak to more profitably move away from sales of film, paper, and other chemical-based products. Those legacy products led to a slide in revenues, from $3.7 billion in last year's second quarter to $3.4 billion in the same period this year. Kodak's profit picture has also looked rather dark, as the company reported its seventh consecutive quarterly loss. Digital sales were the one bright spot in its statement, rising 6%, while film and developing sales dropped 23% from last year.

Kodak was long resistant to switch to digital cameras, clinging to the notion that people would want to retain their memories on traditional film. When the first digital cameras produced grainy results, and only professionals could afford high-end four-megapixel models, that strategy may have been wise. Yet today, even basic cell phones given away for free by wireless carriers include megapixel cameras that produce respectable pictures, even if they're not up to professional standards. In addition, consumers can now buy digital cameras with more megapixels than they'll ever need, and print out high-quality photos at home.

Kodak finally and wholeheartedly embraced the digital trend several years ago. Today, the company is a leader in digital camera sales, along with Canon (NYSE:CAJ), Nikon, Olympus, and Pentax. As it strives to produce more profits, Kodak is increasingly focused on expanding its margins rather than growing sales.

Last year marked the first time that sales of digital products surpassed sales of traditional film products. In the most recent quarter, 54% of Kodak's revenue came from digital products. Even so, digital products don't bring the same repeat business that sales of film, paper, and processing did. With a predicted 22% decline in film sales, and only a 10% increase in digital sales, the company needs to continue cost-cutting. It plans to eliminate another 2,000 jobs by the end of 2007, which would bring Kodak's total job cuts since 2004 to as many as 27,000.

By the end of next year, Kodak anticipates that it will have completed its transition to a digital company. The restructuring has taken a toll on the company's finances; Kodak recorded a $214 million related charge in the most recent quarter. Don't automatically assume, however, that this is a good time to buy into the company. While the stock plunged 14% yesterday to a 52-week low, and the company retains $1 billion in cash on the balance sheet, Kodak has been in turnaround mode for a while now, and results have been slow in coming.

However, I find that Kodak may be an interesting value play at these levels. The company's digital sales will obviously play a larger role in its future fortunes; they turned profitable for Kodak ahead of schedule this year, and the company seems confident enough in its industry position to concentrate on margin expansion at the expense of sales growth. Though Kodak may seem lost in the darkroom, now might just be the Kodak moment to develop profits with a well-timed investment.

Get a clearer picture of Kodak with further Foolishness:

• Kodak's Digital Struggle
• Kodak's Digital Focus
• Kodak Delays Wireless Plans
• Not a Great Kodak Moment
• Can Kodak Come Back?

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Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.