Kodak's Earnings Warning Not Yet a Buying Opportunity

What Happened?
Film giant Eastman Kodak (EK) warned Tuesday morning that third-quarter earnings per share will fall $0.20-$0.25 short of consensus estimates, which had been around $1.60. The company blamed the shortfall on unexpectedly weak September sales across the board as a result of high raw material costs and the strong dollar. Kodak's stock was down more than 20% Tuesday morning on the news.

What It Means for Investors
The problems cited by Kodak are short-term ones, external to the company itself, and don't have much effect on the long-term outlook. Even though Kodak's August sales were strong, we think it was almost inevitable that the dollar's recent strength would have some effect on sales, given the company's large foreign exposure.

But the dip isn't necessarily a buying opportunity, because Kodak still faces some long-term issues that are far from resolved. The biggest of these is digital photography, which threatens to cut deeply into the film sales that are still Kodak's meal ticket. Kodak was late to the digital party, and its digital division, despite some significant strides, has been somewhat disappointing so far. Tough competition from such rivals as Sony (SNE), the leader in digital cameras, has not helped. Despite its lower price, we think that prudent investors should continue to be wary of Kodak until it shows that it can be a major force in digital photography.