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Stock Analyst Update

Kodak Meets Estimates but Still Faces Uncertain Future

Growth of digital division will be key to survival.

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Film giant Eastman Kodak (EK) reported a fairly boring quarter Friday, posting results in line with expectations. But worries about Kodak's digital strategy have weighed on the stock price this year, and that's likely to continue until the company proves that it can be a long-term leader in digital photography.

Kodak's earnings of $1.62 a share, excluding one-time items, was up 6% from the year-ago quarter, just about what Wall Street had been expecting, and the company said that it expects to meet analysts' estimates for the rest of the year as well. Revenue grew 4%, but would have been 8% with currency adjustments. This was the sixth straight quarter that Kodak has met or beaten analysts' estimates.

The major concern is Kodak's ability to adapt to the growing popularity of digital photography, which doesn't use film. Kodak was slow at first to make the leap to digital, for fear of cannibalizing its film sales, but over the past couple of years it has aggressively pursued the digital market. Digital imaging now accounts for 20% of Kodak's revenue, but the company hopes to make that number 50% by 2005.

However, Kodak still trails Sony (SNE) in the digital-camera market, and growth in Kodak's digital division was lower than expected this quarter. The division is losing money and is not expected to turn a profit for at least a year or two. Kodak's ability to quickly make its digital division profitable and grab market share is the key to the company's future.

David Kathman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.