Industry Analysis on Housing
This a report on the US housing market. Whether you agree with the author’s assumptions or not, he carefully lays out his thesis. Also, his research shows the difficulty in investing in cyclical industries. The future is unknown, but if you can find a skewed risk reward opportunity then pursue it.
Kodak Case Study in Strategic Logic
Value-Line on Kodak: http://www.scribd.com/doc/73498449/EK-VL. Note the high returns on capital pre-2000.
50-Yr. Chart: http://www.scribd.com/doc/73498399/50-Yr-Kodak-SRC Note how the stock price of Kodak (EK) begins to underperform the stock market back in 1973/74. Back then (1972) the digital camera was invented. Coincidence or every picture tells a story doesn’t it? (Rod Stewart).
The history of the digital camera: http://inventors.about.com/library/inventors/bldigitalcamera.htm
Digital imaging also had another government use at the time that being spy satellites. Government use of digital technology helped advance the science of digital imaging, however, the private sector also made significant contributions. Texas Instruments patented a film-less electronic camera in 1972, the first to do so. In August, 1981, Sony released the Sony Mavica electronic still camera, the camera which was the first commercial electronic camera. Images were recorded onto a mini disc and then put into a video reader that was connected to a television monitor or color printer. However, the early Mavica cannot be considered a true digital camera even though it started the digital camera revolution. It was a video camera that took video freeze-frames.
Bill Miller Loses on Kodak
Bill Miller bought Kodak near $60 and then many years later sold at $1. He said to a reporter that Kodak was his biggest mistake. He underestimated the need for a cultural change to turn the company around. Do YOU agree with his assessment of his mistake? Not to pick on Mr. Miller, but using strategic logic what questions would you ask if Kodak was transitioning from film photography to Digital? What might you do if you were the CEO?
In 2002, Fortune described the quandry Kodak faced in this article: http://money.cnn.com/magazines/fortune/fortune_archive/2002/02/04/317510/index.htm
Kodak: In The Noose
Andy Serwer February 4, 2002
(FORTUNE Magazine) – When I was a boy, my grandfather gave me a few shares of Eastman Kodak. I never got a chance to talk to him about it, but I’m sure his thinking was, “Taking pictures is a great business. People will always take pictures, and Kodak is the big fish in that pond.” Well, for years my grandfather was right, and Kodak was a fair, though by no means stellar, stock. Now, however, it seems that only the first part of Grandpa’s axiom holds true. Everyone still takes pictures, but increasingly Kodak isn’t the big fish in the photography business.
Despite all of Kodak’s best efforts, this grand old American brand could very well go the way of Wang and Xerox. Which is to say the company may be hanging around for years, but for all intents and purposes, it’ll just be twisting slowly in the wind.
EK is under siege. On one side, Fuji and others are chipping away at Kodak’s very profitable consumer film business. On the other, the digital image revolution (i.e. digital photography) is hitting critical mass. Yes, Kodak is a big player in that arena, but even if it succeeds there–which is far from clear–that’s a much less profitable business than those little yellow boxes.
Take a look at the numbers. In 1991, Kodak had $19.4 billion in sales. Last year, it’s expected to have done just a bit over $13 billion. And while net income hit close to $1.4 billion in 2000, that’s about what it earned in 1988. The company has recorded “nonrecurring” losses in ten of the past 12 years. Kodak’s dividend is now $1.80 per share, but some analysts don’t think the company will earn that this year. The stock, which hit $94 in 1997, now trades for $27. (How long, you might ask, before the good people at Dow Jones do what they did to Woolworth, Bethlehem Steel, and Union Carbide, and throw EK off the DJIA?)
But there is an even more disturbing figure for EK shareholders: Sales of digital cameras climbed an estimated 30% last year, to 5.5 million units. Now, Kodak makes digital cameras–in fact, it recently became the market share leader. But (1) Kodak’s digital camera business isn’t profitable, (2) every time someone buys a digital camera he is no longer a customer of the company’s high-margin film business, and (3) to succeed, Kodak must compete with the likes of Sony and Canon.
Kodak says it’s hurting because of the recession and the slump in travel since Sept. 11. (“Why then,” asks one short-seller, “is its medical imaging business also slumping?”) As for digital photography, the company says that it’s not only selling cameras but also high-quality paper and other digital photo-finishing services. Again, though, margins there are nothing like those in film. The other problem with digital photography is that consumers seem to print far fewer images. Why bother? You just store ’em on a disk or PC and print out the few you want when you want ’em.
Management at Kodak has long been considered–to quote one knowledgeable Wall Street source–“entrenched, inbred, and unresponsive.” (And one key outsider, COO Patricia Russo, just left to head up Lucent.) I doubt, however, that any manager could “turn around” Kodak. What’s happening doesn’t lend itself to a restructuring. To exaggerate only slightly, we are talking buggy whips here. Film for Kodak is somewhat like long distance for AT&T: a mature, still profitable business that’s very much in decline. One thing to do would be to take Kodak’s film operation and turn it into some sort of master trust that pays out cash to shareholders. But that would probably require a level of fortitude that only an outside-raider type like Carl Icahn possesses.
Sure, film will be around for years, but let’s be real: Digital cameras are totally changing how we take pictures. Here’s a story: Friend of mine told me about a woman who mostly uses a digital camera. One day she had her old SLR instead. Her daughter looked in the back of the camera after a shot and asked Mommy where the picture was. “This camera doesn’t let you see the picture,” Mom said. “Then why are we using it?” the kid asked. Get the picture?
You answer should be no more than a few sentences. Bill Miller is an intelligent, well-read investor but he failed to think strategically (yes, easy to point fingers with hindsight bias). But you can take the same analysis of entering the digital photography market and apply it to investing in Salesforce, Inc. (CRM) today. If you were to invest in CRM, what questions must you ask?
If you have trouble with this case, I have started a training camp to teach strategic logic. Watch a clip of a recent training day: http://www.youtube.com/watch?v=6eXFxttxeaA
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