Kodak's Future Remains Blurred amid Sales Slump

What Happened?
Film giant Eastman Kodak (EK) on Wednesday announced third-quarter earnings of $1.40 per share excluding noncash charges, down 3% from a year ago but slightly above Wall Street estimates of $1.37. Those estimates were drastically lowered two weeks ago when the company announced an unexpected slowdown in sales. On Wednesday, Kodak explained that this sales slowdown came mainly in its consumer film and professional segments, and said that it would take an inventory write-down in the fourth quarter that would reduce earnings from an expected $1.24 per share to between $1.00 and $1.15.

What It Means for Investors
We think that there's still too much uncertainty about the future to pull the trigger on Kodak shares just yet. Fears about Kodak's ability to adapt to the emerging realities of digital photography have kept the stock price down, and Wednesday's results did little to allay those fears. While digital products and services now account for 21% of Kodak's revenue, the firm faces tough competition from startups and established players alike. CEO Dan Carp pointed out during the conference call that sales of digital products are still dwarfed by traditional film sales, but he admitted that Kodak's worst performance has come in its professional division, where digital photography has supplanted film much more quickly than among consumers.

Carp focused much of his attention during the conference call on Kodak's near-term plans to get inventories under control and prepare for an economic slowdown. Those are laudable goals, but Kodak's long-term prospects rely on the firm's ultimate role in the still-evolving digital market. We don't think that digital photography will ever completely replace film, but Kodak's current dominance could be greatly diminished as more digital-savvy companies gobble up market share. Until Kodak shows better evidence that its digital strategy will work, we recommend treating this stock with a lot of caution.