Can Old Dow Dogs Learn New Tricks?

Physician's Money Digest, November15 2003, Volume 10, Issue 21

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Historical perspective is a very useful tool inevaluating a company's present circumstancesand future prospects. Let's take alook at Eastman Kodak and Motorola, 2companies with grand histories but a lot of current (Yiddish for "troubles").

Motorola's Troubles

In the mid-'90s, Motorola failed to exploit aproduct it had helped pioneer. After leading thedevelopment of analog cellular phones in the late'70s, by the early '90s, Motorola held more patentssurrounding global systems for mobile communications(GSM) digital cellular phones than any othercompany in the world. GSM became the digital formatembraced as the common standard acrossEurope and most of Asia. Motorola decided not topursue digital telephony aggressively, choosinginstead to coast on its dominant and highly profitableposition as king of the analog hill.

Once the move to digital had become a tidal wave,Motorola moved headlong into competing projects tospeed its digital phones to market. The result was thateach phone had its own distinct platform with insufficient commonality of parts and software to facilitatethe manufacturing efficiencies Nokia enjoyed.

A company with $30 billion in annual revenueswill have at least a benign economic backdrop. A $5-billion company can even grow through bad times bygaining market share, launching new products, orentering new geographic markets. At huge companiesgenerating $500 million a week in revenues, thatbecomes an impossible task. Motorola is now a sleekercompany (60,000 employees have been trimmedfrom the payrolls) in a much-improved economy.Most of the hard work has been done and improvementis already visible.

Kodak's Fuzzy Focus

Eastman Kodak is the Dow's current basket case.Kodak is another once proud, mature Dow stock fallenon hard times. A century ago, Kodak brought photographyto the masses with its exciting box camera.Ever since, it has been a leader in chemical coatings. Itknows more about color than any company, andinvented digital photography.

Yet it also suffered internal battles between theentrenched old guard of the film business and the proponentsof digital imaging. Money talks, and it was thefilm company that produced huge profit margins andthe cash flows needed for investments in Kodak's future.Digital, lacking in profits, clearly played third fiddle.

A decade ago, George Fisher arrived as Kodak'sCEO (from Motorola, coincidentally). He cleaned upthe debt-laden balance sheet, supported the developmentof new digital products, and expanded Kodak'sfilm presence in emerging markets. His programworked for a while. However, Kodak's success inAsian markets caused severe problems when thosemarkets collapsed in 1997 and 1998. At that time,Fuji took dead aim for Kodak's US market share andprofits by severely cutting prices. Kodak stock sold forless when Fisher left than when he arrived.

Kodak recently hosted an analysts' day in NewYork to unveil its latest management team and businessplan, moving Kodak aggressively toward its digitalfuture now that the film horse is "out of thebarn." The company showcased a number of excitingnew products in several competitive markets: digitalphotography, color printers, color monitors, and medicalimaging systems.

Aggressive players already exist in each of thesebusinesses and they are more accustomed than Kodakto stiff competition and rapid product cycles. To ensurefunds for its future plans including acquisitions,Kodak slashed its dividend payout by 70%, causingdividend investors to run for the exit. As one wouldexpect, management also made a great effort to lowballexpectations for the future. Execution is alwaysthe key to any turnaround. Only time will tell if ahuge recovery awaits shareholders, or if it will be arerun of the Fisher years at Kodak and another well-intentionedfalse start.

Joan E. Lappin is president and CIO of NYC-basedGramercy Capital Mgt Corp, which hasbeen top-rated in the Nelson's Directory ofRegistered Investment Advisors. Her investmentoutlook for 2003 was featured in the year-endBusinessWeek double issue. For questions, comments,or to attend an investment seminar, call212-935-6909 or e-mail jlappin@gramercycapital.com.