BOSTON (CNN/Money) -
Daniel A. Carp, Eastman Kodak's CEO, must have felt pretty good strolling into the investors meeting in New York last week.
Carp was there to tell the nonbelievers that, in fact, he was right a year ago to turn the company around, shifting it from its legacy of film-based products and services to a digital future.
At the gathering, he pronounced his vindication: The company had upped the projected sales increases of its digital products and services from 26 percent compounded annual growth to 36 percent between 2003 and 2007.
The market, understandably, reacted favorably to the announcement, nudging the stock up just shy of its 52-week high, on volume three and a half times the average.
The analysts, however, were unfazed. A sampling of six companies covering Eastman Kodak shows nary an upgrade. Only one analyst rates the company a "buy." Everyone else has a "hold" rating or lower.
They are wrong. I think Eastman Kodak (EK: Research, Estimates) warrants investor consideration, with only one significant caveat, which I'll discuss later.
Why the analysts are wrong
Atop the analysts' list of concerns is the shrinking of Kodak's gross margins from roughly 60 percent to about 20 percent.
While it's hard to refute that data, the company's extreme cost-cutting efforts -- which it is executing very well, by the way -- will help offset the margin crunch in the short term.
"If you look at last September, when they announced the [digital] program, everyone said they couldn't execute," says Ulysses Yannas, an analyst with Buckman Buckman & Reid. "The sales of their conventional products are moving down, but they're moving their costs down faster." Yannas has a "buy" rating on the company and owns "a couple thousand shares" of the stock.
Kodak is currently in the midrange of the camera market. As such, it's better positioned than the low-end players when margin erosion hits the segment. Kodak's competitive position and strong product mix are working.
Research firm IDC reports that the company is No. 2 in the digital-camera market in the United States, behind Sony and ahead of Canon and Olympus. What's more, IDC reports that Kodak sold 80 percent more cameras in the second quarter of 2004 than it did a year earlier.
Room to grow
Those impressive sales gains tell us another thing: The digital-camera market is still very young, with lots of room for growth. According to IDC, only about 30 percent of U.S. households own digital cameras. Grabbing market share is a high priority in such a nascent market, and at No. 2, Kodak is playing the game very well.
Much has been made recently of the potential for camera phones to encroach on the digital-camera market. Though that day is still a long way off, Kodak has already carved out a nice position for itself there. It has struck deals with AT&T Wireless and Verizon to provide printing services, although I'm not confident that will bring about any significant revenue until the cellular carriers change their pricing structures.
More important, the company has moved rapidly into the image sensor market for camera phones. As the camera phone market continues to grow, Kodak has a great position.
Now for the big caveat: In part as a result of the CEO's bullish comments, Kodak is currently trading just below its 52-week high, with a forward price/earnings ratio of 12.47.
It's always hard to recommend a stock when it's already had a run-up, but I believe in the company's turnaround story and think it's well positioned for the seismic shifts occurring in the film and camera industry. If it's still too rich for your blood, keep an eye out for any dips. There might just be a Kodak moment.
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