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Kodak Prints More Red Ink

Shares dipped Friday after the photography giant reported a narrower first quarter loss amid shrinking sales

Eastman Kodak (EK) has made headway during recent months in its struggle to lose less money in the brave new world of digital imaging. But Wall Street players, expecting better, sold the stock on May 4 after hearing the photography giant's first quarter results and forecast for 2007.

Kodak lost $151 million during the quarter ended March 31, compared to $298 million during the same period last year. "I'm very pleased with our first-quarter performance, in which we made significant progress on our two key objectives for 2007 - new product success and cost reduction. Thus far the year is proceeding on plan," said CEO ~

The Rochester (N.Y.) company has lost money, let go of tens of thousands of staff, and shut down factories during recent years in the face of competition from digital camera makers like Sony (SNE) and Canon (CAJ). As people snap more digital pictures instead, Kodak's old consumer film business sold 13% less year over year to $896 million during the first quarter. Given such challenges, the company's overall sales fell 8% year over year to $2.119 billion.

Perez has been trying to revive Kodak by establishing a stronger footprint in digital photography. On Aug. 1, for example, Kodak announced plans to have Flextronics International (FLEX) manufacture and distribute its digital cameras. Kodak is also working on expanding its product line-up. In February the company announced a new product line of multipurpose machines that not only handle photographs and documents but make copies and send faxes. The printers use ink that will make photos stay vibrant for 100 years rather than 15 - and whose cartridges cost half of what consumers are used to paying (see, 2/6/07, "Kodak Launches a Printer Offensive").

After such efforts, Kodak's digital revenue totaled $1.210 billion, a 3% decrease compared to last year. Making matters worse, Kodak now expects 2007 full-year digital earnings from operations of $150 million to $250 million, instead of the $200 million to $300 million forecast earlier. Kodak says digital revenue growth will range between 3% and 5% during 2007, while total revenue will fall between 4% and 7% during the year.

Market players didn't like the sound of that. Investors sold Kodak's stock 4.4% to $24.84 per share in early afternoon trading on the New York Stock Exchange May 4.

"We are increasingly skeptical that EK can efficiently generate digital revenue growth and we think additional plant closings, job cuts and development costs will continue depressing results," Standard & Poor's equity analyst Tom Graves said in a research note. (S&P, like, is owned by The McGraw-Hill Companies.) Graves cut a 2007 earnings per share estimate to 10 cents from 98 cents and a 12-month target price on the stock to $22 from $24 per share.

With sales down and $2.75 billion of debt looming, Kodak has already had to use hardball tactics to come up with cash - sacrifices that have enabled the company to improve its costs as a percentage of revenue to 19% in the March quarter, down from 22% in the year-ago quarter. The company has saved hundreds of millions in recent years by closing factories and letting go of employees. Kodak is also shedding assets and said in May that it sold its health group Carestream Health, Inc. to an affiliate of the investment firm Onex Corp. for up to $2.55 billion.

Now the company has decided to increase its inkjet investment by as much as $50 million "in order to fully capitalize on strong customer reaction." As a result Kodak thinks it will generate more than $100 million cash during 2007, compared to its earlier estimate of between $100 and $200 million.

In the fourth quarter, the company posted its first profit in two years -- a reflection of cost cuts, not rising sales (see, 2/1/07, "Kodak's Turnaround Keeps Developing"). Investors had bought Kodak stock after the news, but they're apparently losing patience.

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