In this series, we take a look at the 25 stocks on the S&P 500 Index (SPX) that have turned in the worst performance during the past decade -- what went wrong, and what happens next.
Be honest -- when was the last time you dropped off a roll of film to be developed? If your response dates back to the 1990s, the unpleasant fate of Eastman Kodak Company (NYSE: EK) probably doesn't need too much explaining. The way we take pictures and use paper has shifted drastically in the past decade, and Eastman has struggled in its attempts to keep up (with more "struggling" than "keeping up" involved, nearly every step of the way).
What went wrong? At No. 11 on our list of SPX dawdlers, EK shed 80% of its value during from June 30, 1998 through June 30, 2008. The stock tapped an all-time high near $95 in early 1997; during the decade in question, the shares peaked at $88.94 in July 1998. It was to be the first in a long series of lower highs for EK as it cascaded down the charts.
Eastman Kodak entered 1998 with an aggressive turnaround plan. The elimination of 20% of EK's payroll was meant to help stem the tide of diminishing profits and market share for the one-time leviathan of photography; the company was floundering in the face of heightened competition from the likes of Fuji. EK also unloaded a chain of retail stores and non-core businesses, but a gradual increase in profits couldn't mask disappointing sales growth.
As the millennium turned, Kodak's business was also entering a new era. Silver halide print photography was being replaced by digital, which boasted stronger growth prospects than old-school film - but far slimmer profit margins. Plus, an entry into digital also meant that EK would have to compete with new, heavyweight tech-sector foes such as Sony (NYSE: SNE) and Canon (NYSE: CAJ).
Before long, sales slowed to a crawl, and then to a limp. EK shares plunged in the fall of 2000 after executives slashed second-half earnings estimates no fewer than three times. In early 2001, investors punished EK shares again when the company said it would suspend its $2-billion share buyback program in an attempt to pare its debt, and once more slashed its earnings guidance. During the next few years, a continued string of profit disappointments prompted even deeper job cuts at Kodak, and it seemed the company could only beat Wall Street's estimates after everyone's expectations were downwardly revised to basement-level.
In the spring of 2004, editors at the Wall Street Journal made their own commentary on EK's changing relevance to the U.S. economy. Along with AT&T (NYSE: T) and International Paper (NYSE: IP), Eastman Kodak was removed from the Dow Jones Industrial Average. At the time, EK's 74-year tenure on the Dow was exceeded only by that of original components General Motors (NYSE: GM) and General Electric (NYSE: GE). Unfavorable comparisons began to crop up, with analysts likening Kodak to similarly outdated business models - most notably Xerox (NYSE: XRX), and, somewhat more harshly, the buggy whip.
What next? News of a $1-billion stock buyback program did boost the stock in June, but EK has since pared those gains and is stuck near $15. At least one shareholder was less than impressed by the plan; Franklin Mutual Advisers, a 5.4% stakeholder, recently asked EK to expand the program to return more value to investors. No official response has been issued by the company.
And, not to jump on the bandwagon, but the brutal broad-market environment of the past year has done about as much for EK as it has for the buggy whip. Last May, Bob O'Brien commented ruthlessly on the shares' stagnation in a Barron's blog, noting that the company "spent four years undergoing a grueling restructuring aimed at converting from a stodgy analog company to a contemporary digital diva, and this is what it has to show for it: a share price stuck where it was in 1978." Unsurprisingly, Zacks reports that not a single analyst currently recommends buying the shares.
Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the weekly video series Option Basics on SchaeffersResearch.com.
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