Buy, Sell, or Hold Eastman Kodak?
A recent headline in The Onion read "New Apple CEO Tim Cook: 'I'm Thinking Printers.' "
The Onion's fake blurb about a new direction for Apple was ironic and hilarious, but what if it was true? Imagine a company embracing printers as the future in the digital age.
Now stop imagining. About two months later, that was the precise direction discussed by Eastman Kodak (NYS: EK) . Can the digital photo pioneer evolve with printers? Let's take a look at Kodak's prospects through a buy, sell, or hold analysis for 2012.
Outside of its printer ambitions, the buy proposition for Kodak hinges on the company's treasure chest of digital-imaging patents. Although estimates vary, certain sources have discussed a price tag of almost $3 billion, significantly more than Kodak's $170 million market cap.
In the best-case scenario, Kodak pulls off a sale similar to that conducted by Nortel Networks earlier this year. Several companies, including Apple (NAS: AAPL) , Microsoft (NYS: MSFT) , and BlackBerry maker RIM (NAS: RIMM) , snatched up Nortel's wireless and networking patents for a total of $4.5 billion in July. Unlike Nortel, however, Kodak intends to conduct a sale outside of bankruptcy court. Therein lies the challenge.
Over the past decade, new devices like Apple's iPhone and Google's (NAS: GOOG) Android have made Kodak's cameras less relevant to our everyday lives. Ironically, your family's treasured "Kodak moments" probably won't be captured with a Kodak this holiday season. So the brand that Kodak developed over a century is fading faster than a vintage photograph.
CEO Antonio Perez believes he can rebuild the Kodak brand through printing technologies. In the third quarter, Kodak reported a printer shipment increase of 50% during 2011, but still posted a loss of $222 million from continuing operations. Printing-related products have failed to generate cash and the company is relying on external funding to stay afloat.
The likelihood of Kodak entering bankruptcy increases with every delayed asset sale or funding withdrawal. Just a few days ago, two key hedge funds backtracked on the amount they were willing to lend, further exposing (overexposing?) Kodak's cash issues.
In the eyes of many investors, Perez's push into printers might be too little, too late.
In discussing the possible Kodak scenarios with fellow Fool John Reeves, he made the point that this stock is either going to be a home run or a free-swinging strike out for investors.
If Perez can step up to the plate and execute an asset sale, Kodak's share price could recover. Unfortunately, Perez often fails to deliver in clutch situations. This year alone, Kodak's price has fallen 88%, and it's off over 97% since he assumed the CEO position in 2005. For investors curious about the future of this fallen giant, the best vantage point might be from the dugout.
The final call
I have watched CEOs execute phenomenal turnarounds in the past 15 years. Steve Jobs resurrected Apple by streamlining the company and creating quality desktops and laptops. Alan Mulally rescued Ford (NYS: F) by embracing a new management style and resurrecting key brands.
However, the difference between Kodak and these companies lies in the industries they are in. Ford and Apple were knocked down, but they weren't fighting a losing battle. Cars and computers are still in high demand, but Kodak's film and even digital products are being replaced by new technology.
I'm not convinced a once-dominant photo company can regain its footing through low-margin printers. As a result, I believe investors should look to sell Eastman Kodak's stock in 2012.
For Perez and Kodak, the picture isn't pretty. For investors, this is a lesson on the fast-paced world of technology. Here at the Fool, we have research analysts focused on breakthrough companies that will benefit from devices like the iPhone and Android. We've compiled a list in a recent report, "3 Hidden Winners of the iPhone, iPad, and Android Revolution." Thousands of other investors have downloaded the report. Get a free copy for yourself by clicking here.
At the time this article was published Fool contributor Isaac Pino does not own shares in any of the companies mentioned in this article.The Motley Fool owns shares of Google, Ford, Microsoft, and Apple.Motley Fool newsletter serviceshave recommended buying shares of Google, Apple, Microsoft, and Ford.Motley Fool newsletter serviceshave recommended creating a bull call spread position in Microsoft and creating a bull call spread position in Apple. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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