Generally speaking we do not like resurrect candidates for CEOs to go.  We first named Antonio Perez of Eastman Kodak Co. (NYSE: EK) in late 2006 as a CEO to go in 2007.  It looked like he was going to get the ship off its side and sailing again, but that time looks like it has come and gone.  The economy is not going to help the company out at all, but Kodak has contraction issues that go far deeper than the consumer spending habits of America and the world.  It really looks like Perez is not going to be able to fix the situation.

Finding replacements for old economy companies of this size will be noeasy task.  If you were going to turn around a company, wouldn’t youwant to go to a business where the upside is there when the economyturns too?

Mr. Perez is both Chairman and CEO and is probably too entrenched andtoo dug in to get tossed out by force.  He always comes across as agentleman and we have heard he is rather humble and is easy to get along with.  But the long cutbacktrail has been an even slower bleed than the move starting in the midto late 1990s of digital cameras taking place of old traditional filmcameras.

Eastman Kodak has tried more and more to get into the digital film andquasi-stock photo business, but we genuinely think it is going torequire more of a Machiavellian approach with broad consequences insidethe company.  Eastman Kodak is still a legacy company and old economy company,and there are unfortunately no guarantees that its 130-year historyassures its place in the future.  There are just too many competitors in the digital photo operations, in the printing operations, and in the old-fashioned film business.This new digital cinema push that has taken far too long is also not anassured win for Kodak.

This new digital printer initiative is a very intriguing one.  Forunder $200 and free shipping you can get a wireless printer for photosand documents that is supposed to get more prints from the ink and onewhere the color ink only runs $14.99 for new cartridges.  The savingslook incredible, but there is one small problem here: cheap productswith this many features in scanning and copying has to come with lowmargins. Unfortunately, we will not know how this works out for sometime.  This sounds great for the consumer if the print savingsare truly as much as the company represents.

When we first called on Perez to go this stock was around $20.00 andwas already down 66% from the highs back in the 1990’s. Unfortunately,that drop has been repeated and shares now sit close to $7.00.  Itsmarket cap has steadily slid and this former DJIA component now has amarket cap of under $2 billion.  In June, the company announced an IRSrefund and a plan to buy back up to 25% of its stock.  Shares were twice as high as they are now.  As other companies have found, buybacks can’t stop mudslides.
We also questioned its last round of price hikes, and that doesn’t seem to have worked.

The company has seen a severe reduction to earnings estimates of late and now itis expected to earn only $0.17 EPS in 2008 and $0.26 EPS in 2009.  Butthe revenues are also still shrinking and the economy may not helpthat.  Film is ancient, and the cost of printing technology and digitalimaging seems as though it is in a race with DRAM and low-end PC’s tosee which can hit zero first.

We did call for Antonio Perez to go two years ago.  Unfortunately, we have to call him back on to the list of CEOs to go for 2009.  If you go through the list of 2008 CEO’s to go, almost all of those called out have moved on by now and many in the same strategic sense we outlined.  If you go through our list of 2007 CEO’s to go, you’ll see that most have also moved on or have adopted similar changes.

Jon C. Ogg
December 5, 2008

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