Some Investors Bet on Kodak Turnaround

Just when Eastman Kodak Co.’s destiny seems dimmer than an old-fashioned darkroom, along comes a class of investors who like what they see.

Willing to bet that the 123-year-old photography icon will make the painful transition from film to digital imaging, they are helping boost its stock as it lumbers into a crowd of younger, high-tech competitors.

Money manager John Dorfman, for one, has wagered nearly $1 million on Kodak’s future.

“We consider it one of our higher-risk stocks, but we think it’s a very intriguing speculation,” Dorfman said by telephone from Newton Centre, Mass., where Dorfman Investments boasts $33 million in assets and a stellar four-year track record.

“I expect more than likely we would hold it a year or more,” he said. “The stock seems to me cheap enough that Kodak doesn’t need to dominate digital the way it dominated film; it just needs to be competitive for the stock price to increase. I think they’ll surprise people.”

Value and contrarian investors have perked up as Kodak, a tarnished performer in the Dow Jones industrial average, tries to shake off its dependence on the shrinking market for film and find a place among digital heavyweights such as Hewlett-Packard Co., Sony Corp. and Lexmark International Inc.

(Value investors snap up stocks that have been beaten down but look cheap relative to underlying measures of value, such as a company’s per-share profit or sales. Contrarians take an against-the-herd approach to investing.)

Eight of the 10 biggest institutional shareholders raised their stakes in the July-to-September quarter. Although most fourth-quarter data won’t be posted for a few weeks, traders say market tracking services indicate that four of the top five investors, led by Legg Mason and Dodge & Cox, have poured in more money since November.

On Sept. 25, Kodak unveiled an ambitious strategy to accelerate its foray into film-less imaging markets. The company also acknowledged that chemical-based photography businesses, which accounted for the bulk of its profits for more than a century, are in irreversible decline.

Rather than borrow money to pay for the transformation, Kodak slashed its annual dividend for the first time, from $1.80 to 50 cents, to help free up $3 billion in digital investments.

Citing uncertainty over Kodak’s ability to execute, most analysts advised investors to sell.

The stock, which had been hovering at $27, dropped nearly $5 in a day. By early October, it hit a 23-year low of $20.50, and a potent group of shareholders known for seeking out troubled companies began agitating for a turnaround.

While Kodak stuck to its guns, a flurry of buyers emerged. One was Circle T Partners, which bought 303,500 shares in the low $20s, then sold them all two months later for about $25.

“We like to play stock price dislocation,” said Seth Tobias, who runs the New York hedge fund. “We kind of thought the baby was being thrown out with the bath water.”

By Thanksgiving, after Kodak had taken pains to spell out its tactics, the investment community looked more inclined to give the company time to play its hand. Days later, Dorfman bought Kodak shares for the first time for about $24.

The stock got a lift in January when Kodak revealed plans to trim 12,000 to 15,000 jobs, or as much as 23% of its payroll, by 2007. Shares topped $30 but have since settled in the $29 range, closing at $29.03 on Friday.

Although the new arena appears daunting, and profit margins are far slimmer, Kodak is putting up a fight: Its digital businesses made a profit for the first time last year, driven by giant leaps in revenue from top-selling EasyShare digital cameras and an online photo-sharing service.

Not everyone finds the stock attractive. Kodak is projecting 5% to 6% growth for the next few years, not nearly high enough for Bryce Capital Management in suburban Rochester.

“Anybody who bought the stock in September was not a growth investor,” said co-owner Dennis Lohouse. “They were truly looking at this as distressed merchandise with an intrinsic value that they thought could be realized over time.

“Investors that have come in more recently,” he added, “are more of the ilk that the company is becoming a turnaround.”