Kodak’s Competition Exposure, and Why Trump Hotels’ a Bad Deal

Stock Exchange gives readers a chance to listen in as Times staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks and other investments.

Eastman Kodak (EK)

Mike: We start today with a grand old name of American industrial might.

Jim: Emphasis on “old,” Mike. Kodak is still among the planet’s most recognized brands, and its stock is one of the famed Dow Jones industrials. But in the 1990s, something went very wrong with this venerable company.

Mike: Boy, did it. Kodak had something like 90% of the U.S. photo-film market in the 1980s. Talk about dominance. But then Fuji Photo Film of Japan began an assault on Kodak’s superiority that still has Kodak reeling today.

Jim: Right. After years of Fuji’s waging a price war with Kodak, Kodak’s share has now dropped below 75%--a huge decline. And that’s the key reason Kodak’s stock has badly lagged the general market for the last eight years, even though Kodak gets more than half of its operating profit overseas.

Mike: In fact, you can date the start of Kodak’s decline to the Summer Olympics in Los Angeles in 1984. There was a bidding contest to be the official film of the Olympics that year, and guess what? Fuji won. In Kodak’s backyard!

Jim: In retrospect, we shouldn’t have been surprised. Kodak’s long-held dominance had made it one of the most arrogant and hidebound corporations in the Fortune 500. That’s why Kodak first dismissed Fuji’s challenge, then was slow to counter it. And I believe it still hasn’t figured out how to best challenge Fuji.

Mike: Here’s an example. A while back Kodak successfully got Fuji labeled as an importer that was wrongfully selling film and photo paper on the U.S. market at below cost. So, Fuji opens a massive manufacturing plant in South Carolina. And guess what? It’s still taking market share from Kodak.

Jim: Kodak tried all sorts of things to maintain its growth. It diversified big time in the late-1980s, buying health-care and consumer-products companies. That flopped and put Kodak heavily into debt. Then in 1993, Kodak’s board hired George Fisher from Motorola to be its CEO--the first outsider to run Kodak in more than a century.

Mike: Fisher had a great reputation and a great record at Motorola, which, under his leadership, really was one of America’s best-performing companies.

Jim: But he, too, has struggled since he arrived at Kodak. To his credit, he sold off all those non-film assets and got Kodak, well, focused on its main business again. Yet despite several restructurings, Kodak is still a muddled company, and I wouldn’t buy the stock.

Mike: Agreed. One thing I find interesting is that Fisher is still talking about getting Kodak’s costs down, despite all his adjustments so far.

Jim: There’s no question Fisher has cut costs--heck, thousands of Kodak employees got axed--and he’s cut prices or offered rebates on Kodak’s film to slow Fuji’s advance. But Kodak’s earnings remained uneven, and the stock’s roller-coaster performance shows the uncertainty Wall Street has going forward.

Mike: That’s an understatement.

Jim: After tanking in 1997, the stock started to recover in the first half of this year as Kodak posted gains in first- and second-quarter profits, which showed Fisher’s cost-cutting was making headway.

Mike: Lower costs also boosted its third-quarter earnings by 72%.

Jim: True. But when Kodak announced those third-quarter results earlier this month, its stock plunged 13% that day alone, ripping away nearly $4 billion of Kodak’s market value! It’s now trading in the low-70s.

Mike: That’s because the problem wasn’t earnings. The problem was a 10% drop in Kodak’s third-quarter revenue. That renewed investors’ fears that Kodak’s sales growth is faltering while it’s simultaneously fighting price battles with Fuji.

Jim: All of this raises the central question: Where is Kodak going from here? It’s unclear to me whether Kodak is betting its future on new technology or whether it’s adamant about protecting market share in its basic film business.

Mike: Or both.

Jim: Right! They’re always developing some new imaging technique, like some cool way you can take pictures and put them on your computer. But is that Kodak’s priority? Even if it means giving away more of the basic film business to Fuji? Or is Kodak’s priority to protect the film market at all costs, even if it means a long price war?

Mike: And in a business like film, marketing is everything. And Kodak hasn’t shown me any particular zip in that area either, lately, to build up sales.

Jim: You’ve hit on it. Most consumers don’t know diddly about photography, nor should they. They drop the film in the camera and expect it to work. So what’s their concern?

Mike: Price.

Jim: Right again. They look in their newspaper week after week and see Target is selling four rolls of Fuji for $6.99 or less. You won’t find Kodak at that price. Believe me, if you did, Kodak’s brand name and reputation would chill a lot of those Fuji sales. So how much is Fisher really fighting back?

Mike: Not only that, Kodak’s also battling at the professional level, where Fuji makes a film many pro photographers now prefer.

Jim: It’s this simple: Kodak hasn’t shown that it can permanently stop leaking market share to Fuji, and until it does, this stock is vulnerable. Maybe Fisher has to get his costs lower still to fight that price war and still grow profit. Maybe he doesn’t want another price war and is satisfied with 60% or 70% market share as long as Kodak’s earnings keep growing. But right now, I don’t know where Kodak stands or where it’s headed.

Mike: We’re coming to the same conclusion: There are tremendous questions about Kodak’s future. The stock reflects that and will continue to, and there’s just not enough here to recommend the shares.

Trump Hotels & Casino Resorts (DJT)

Jim: I was checking out the new Forbes list of the 400 richest Americans the other day and . . . .

Mike: So where did you rank this year?

Jim: Just missed the cut again, I’m afraid. Anyway, I noticed that Donald Trump is there with a net worth of $1.5 billion. Now if we could only say he’s doing for his stockholders what he does for his own wallet.

Mike: Yeah. It’s a variation on the old saw about the stockbroker showing an observer his yacht, and the observer says, “Yes, but where are your customers’ yachts?”

Jim: Exactly.

Mike: Of course, this is old hat with The Donald. The Trump organization is like the House Judiciary Committee and the Jerry Springer Show--something that’s long since outlived its entertainment value, and I think Trump Hotels & Casino’s investors believe that more deeply than I do, and I’ve met the man.

Jim: Trump Hotels owns the two biggest casinos in Atlantic City: the Taj Mahal and Trump Plaza, and another one there, Trump Marina. It’s also got riverboat gambling casinos in Indiana. But as we’ve discussed before, the U.S. gaming industry is in the dumps right now, and Trump’s properties are no exception.

Mike: Even so, I still have a high regard for some of the casino stocks, particularly Mirage Resorts. But that regard doesn’t extend to Donald Trump’s operation.

Jim: I can see why. Trump Hotels is loaded with debt, and it hasn’t turned an annual profit in years, though it did eke out $5 million of earnings for the quarter ended Sept. 30.

Mike: Meantime, the stock now trades under $6 a share, down from $10 early this year, though it’s moved up a bit of late.

Jim: And to keep things looking bright, they use a public relations ploy that’s a favorite of struggling companies with lots of debt, which is bragging about their swell EBITDA.

Mike: Enlighten us.

Jim: That’s earnings before interest, taxes, depreciation and amortization, and if it goes up, companies and Wall Street analysts declare victory. But it’s a sleazy way to make your situation look better, in my opinion. The name of the game is the bottom line, not the line that’s four entries above the bottom. Heck, what company wouldn’t like to express its earnings before debt service and taxes?

Mike: Not only that, Trump Hotels hasn’t been very successful at making even its EBITDA look much better year to year.

Jim: There’s more to this sorry mess. In February, Trump hired a couple of investment bankers to either sell the company or explore some other options, but nothing has come to fruition. So any takeover premium that was in the stock early this year is gone too.

Mike: In the meantime, Trump Hotels has one of the uglier balance sheets in this industry, with almost $2 billion of debt. And a lot of that is costly junk-bond debt that they’ve been unable to restructure to take advantage of today’s unprecedented low interest rates.

Jim: So we’ve got a company burdened by costly debt and operating in a slumping industry. I’d try the blackjack tables before I’d buy this stock.

Mike: Me too. And on top of those problems, Trump is losing some key talent. In just the last few months, Trump Hotels’ chief financial officer left, as did the president of the flagship Trump Plaza Hotel & Casino. Talk about disquieting developments for the stockholders.

Jim: Now, some might think that there’s little to lose buying a $5 stock, especially in light of Donald Trump’s reputation for somehow always landing on his feet.

Mike: That’s a dangerous game to play, because you’re really talking about going into partnership with Donald Trump. The landscape is littered with investors and creditors who thought they could exploit that situation--and who came up short.

Jim: In fact, the short-sellers must be loving this stock.

Mike: Which reminds me: Trump Hotels has one distinction that makes it unique: It actually got a “sell” recommendation this summer from one of Wall Street’s analysts . . . .

Jim: Who are mostly in business to convince people to buy stocks.

Mike: Right. A “sell” rating is harder to find than people who will admit having invested with Long-Term Capital Management.

*

Do you have a stock you would like to see discussed in this column? Michael Hiltzik can be reached at michael.hiltzik@latimes.com; James Peltz can be reached at james.peltz@latimes.com. Or write to either at Business Section, Times Mirror Square, Los Angeles, CA 90053.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Eastman Kodak

Monday, 1998: $73.13

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Trump Hotels

Monday, 1998: $5.44