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Wall Street, California | STOCK EXCHANGE

Kodak's Competition Exposure, and Why Trump Hotels' a Bad Deal

October 27, 1998|JAMES PELTZ and MICHAEL HILTZIK

Stock Exchange gives readers a chance to listen in as Times staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks and other investments.

Eastman Kodak (EK)

Mike: We start today with a grand old name of American industrial might.

Jim: Emphasis on "old," Mike. Kodak is still among the planet's most recognized brands, and its stock is one of the famed Dow Jones industrials. But in the 1990s, something went very wrong with this venerable company.

Mike: Boy, did it. Kodak had something like 90% of the U.S. photo-film market in the 1980s. Talk about dominance. But then Fuji Photo Film of Japan began an assault on Kodak's superiority that still has Kodak reeling today.

Jim: Right. After years of Fuji's waging a price war with Kodak, Kodak's share has now dropped below 75%--a huge decline. And that's the key reason Kodak's stock has badly lagged the general market for the last eight years, even though Kodak gets more than half of its operating profit overseas.

Mike: In fact, you can date the start of Kodak's decline to the Summer Olympics in Los Angeles in 1984. There was a bidding contest to be the official film of the Olympics that year, and guess what? Fuji won. In Kodak's backyard!

Jim: In retrospect, we shouldn't have been surprised. Kodak's long-held dominance had made it one of the most arrogant and hidebound corporations in the Fortune 500. That's why Kodak first dismissed Fuji's challenge, then was slow to counter it. And I believe it still hasn't figured out how to best challenge Fuji.

Mike: Here's an example. A while back Kodak successfully got Fuji labeled as an importer that was wrongfully selling film and photo paper on the U.S. market at below cost. So, Fuji opens a massive manufacturing plant in South Carolina. And guess what? It's still taking market share from Kodak.

Jim: Kodak tried all sorts of things to maintain its growth. It diversified big time in the late-1980s, buying health-care and consumer-products companies. That flopped and put Kodak heavily into debt. Then in 1993, Kodak's board hired George Fisher from Motorola to be its CEO--the first outsider to run Kodak in more than a century.

Mike: Fisher had a great reputation and a great record at Motorola, which, under his leadership, really was one of America's best-performing companies.

Jim: But he, too, has struggled since he arrived at Kodak. To his credit, he sold off all those non-film assets and got Kodak, well, focused on its main business again. Yet despite several restructurings, Kodak is still a muddled company, and I wouldn't buy the stock.

Mike: Agreed. One thing I find interesting is that Fisher is still talking about getting Kodak's costs down, despite all his adjustments so far.

Jim: There's no question Fisher has cut costs--heck, thousands of Kodak employees got axed--and he's cut prices or offered rebates on Kodak's film to slow Fuji's advance. But Kodak's earnings remained uneven, and the stock's roller-coaster performance shows the uncertainty Wall Street has going forward.

Mike: That's an understatement.

Jim: After tanking in 1997, the stock started to recover in the first half of this year as Kodak posted gains in first- and second-quarter profits, which showed Fisher's cost-cutting was making headway.

Mike: Lower costs also boosted its third-quarter earnings by 72%.

Jim: True. But when Kodak announced those third-quarter results earlier this month, its stock plunged 13% that day alone, ripping away nearly $4 billion of Kodak's market value! It's now trading in the low-70s.

Mike: That's because the problem wasn't earnings. The problem was a 10% drop in Kodak's third-quarter revenue. That renewed investors' fears that Kodak's sales growth is faltering while it's simultaneously fighting price battles with Fuji.

Jim: All of this raises the central question: Where is Kodak going from here? It's unclear to me whether Kodak is betting its future on new technology or whether it's adamant about protecting market share in its basic film business.

Mike: Or both.

Jim: Right! They're always developing some new imaging technique, like some cool way you can take pictures and put them on your computer. But is that Kodak's priority? Even if it means giving away more of the basic film business to Fuji? Or is Kodak's priority to protect the film market at all costs, even if it means a long price war?

Mike: And in a business like film, marketing is everything. And Kodak hasn't shown me any particular zip in that area either, lately, to build up sales.

Jim: You've hit on it. Most consumers don't know diddly about photography, nor should they. They drop the film in the camera and expect it to work. So what's their concern?

Mike: Price.

Jim: Right again. They look in their newspaper week after week and see Target is selling four rolls of Fuji for $6.99 or less. You won't find Kodak at that price. Believe me, if you did, Kodak's brand name and reputation would chill a lot of those Fuji sales. So how much is Fisher really fighting back?

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