Sell Kodak now, Bill Miller

Aaron Pressman

The trouble with buying beaten down stocks, as value investors like Legg Mason's Bill Miller are apt to do, is that sometimes they don't come back up. I recall in college thinking that Smith Corona's plunge was overdone on the whole computer word processing fad. Oops. Bill's had nothing but trouble with Eastman Kodak (EK), the endlessly restructuring film company he bought starting in 2000 when the shares were north of $50. Kodak’s been gyrating between the low $20s and mid $30s for more than four years now. After photogs shifting from old school snappers to gee-whiz models have crushed Kodak’s sales and margins, now comes word that Hewlett-Packard (HPQ) is jumping into the photo kiosk business. Bill Miller - it's time to sell.

Kodak has been pinning its hopes on a variety of emerging businesses, including selling its own brand of digital cameras and signing up drug stores chains like CVS to install its customer-operated printing kiosks. Although I didn't see a breakout of kiosks specifically, the company's 10-Q for the quarter ended Sept. 30 said such sales were part of the $708 million of the digital strategies group's revenue. Total Kodak revenue for the quarter was $3.6 billion. Kiosk sales were up 40% over a year including sales of the machines that print out 4x6 prints which were up 140%.

Now what response does Kodak offer in today's articles about the HP kiosk? "We have the longstanding relationship with our partners and we are continuing to innovate," Kodak’s Nicki Zongrone tells the New York Times. Ah, but HP has a disruptive strategy for their disruptive technology here. Their machines are much easier to operate and maintain from a retailer's perspective so they’ll be placed in non-traditional locations like coffee shops. Kodak may have drug stores locked up but there are plenty of other good outlets available.

Now maybe HP’s machines won’t live up to the hype or they’ll be late. But I don’t think it matters. Competition, fierce competition, is coming to this once fast-growing Kodak niche. Don't you think retailers are going to be seeking price breaks and other sweetners ASAP now that they have the leverage of HP's imminent arrival? And ultimately, by putting kiosks in non-traditional places, isn't HP accelerating the decline of the old way of doing things that still brings in a ton of money for Kodak? In the end, today's announcement can only mean more pain for Kodak shareholders. Shareholders don’t seem too worried, yet. Kodak’s off just 11 cents so far today.

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