NEW YORK (CNN/Money) -
After witnessing the demise of Polaroid at the hands of digital cameras, Eastman Kodak is scrambling to avoid the fate of its photographic rival.
Although it reported Wednesday a better-than-expected operating profit, Kodak also said it will cut 4,500 to 6,000 jobs as "consumer adoption of digital photography is growing at a more rapid pace than a year ago, and this is trimming demand for consumer film," Kodak CEO Daniel Carp said in a statement.
That's a troubling sign for a company that gets 20 percent of its sales from the traditional consumer film business, said Ulysses Yannas, analyst with New York-based research firm Buckman, Buckman & Reid.
"They are still very dependent on the consumer film business," he said. "It has very high margins. For every dollar in sales, it makes about 90 cents, so when they lose that, it hurts."
Indeed, early in 2003 the company said it expected the growth of digital camera use to reduce film sales industry-wide by 4 to 6 percent. Kodak said Wednesday it sees that trend accelerating to 8 to 10 percent.
And the growth of digital photography continues to force Kodak to move away from the traditional film business and into higher-growth areas, such as health-care imaging and printing digital photographs.
"[Kodak] knows where it needs to go," said Pittsburgh Securities analyst Jeff Pittsburgh. "They're behind the competition, but they're well aware of what they're doing."
A reflection of Polaroid?
A similar picture developed at Polaroid as the instant-film company cut thousands of jobs and introduced new products in an effort to keep up with its competition.
Polaroid began to see its sales drop off amid the introduction of one-hour or faster film processing, and the decline accelerated with consumers' move to digital. A raft of financial problems eventually forced Polaroid to file for bankruptcy in 2001, and most of its assets were bought in 2002 by the private-equity arm of Bank One.
Kodak and Polaroid have made similar moves to keep up with digital competition, but Yannas says the outcomes will be starkly different.
"There's no similarities in how the companies deal with the transition to digital," he said. "Kodak has a well-thought-out digital strategy. It's moving to exploit every aspect of printing digital photographs, and some of these products have margins that come close to those in its film business."
But Kodak's transition into digital photography has been costly.
The Rochester, N.Y.-based company said it will take a charge of $350 million to $450 million over the next 12 months to cover the costs of the 4,500 to 6,000 job cuts. The work force reduction is expected to save $300 million to $400 million annually.
In addition, Kodak said Monday it will buy dental-imaging firm PracticeWorks for $500 million. Standard & Poor's then downgraded the company's debt, making it more expensive for it to borrow money.
A fading dividend?
These mounting costs have some investors wondering about one of the company's most valued attributes -- a dividend yield that tops 7 percent.
"People have been getting out of the stock before the company makes the decision on the dividend in September" said Pittsburgh. "It's discounted because the Street thinks it will do something, and I expected it to continue that way until then."
Eastman Kodak (EK: Research, Estimates) was the best performing Dow component in 2002, but this year, it's been a different story. Kodak shares have dropped 31.4 percent in 2003, 40.1 percentage points below the gain of the S&P 500.
Richard Stice, equity analyst with Standard & Poor's, thinks there's a good chance the company cuts the dividend when the board meets in September. "Given the debt load, the need to make more acquisitions and the increased borrowing costs, it's possible."
Stice added that there could be an even larger exodus from the stock, as many investors piled into Kodak shares during the bear market to get in on the dividend.
"Kodak's a company in transition with some big issues," he noted. "But I doubt it will follow the same path as Polaroid."
--None of the analysts interviewed for this story own shares of Eastman Kodak.