Wednesday, January 31, 2007

Kodak Profits But No R&D

Eastman Kodak (NYSE:EK) reported a small but significant profit for Q4 of $17 million. It was probably the toughest $17 million they have ever earned. The milestone of digital earnings growth surpassing the rate of decline from traditional product lines was also critically important.

I found the large reductions in R&D expenditures to be troublesome. They were explained away by claiming savings, efficiencies, integration and in one obvious case the pending sale of a division. At no point did they attempt to claim they are working on new stuff that will drive revenues in the future. Yet they claim early in the press release that “…increase in income from licensing arrangements which reflects the company's continuing progress in generating returns from its intellectual property.”

If growth in digital earnings is to continue either R&D has to be properly focused on a ramp up or you will have to buy it. A $42 million dollar decrease in Q4 R&D expenditures to generate a $17 million profit looks suspicious and opportunistic.

Kodak is like the wolf whose foot is caught in a trap. It eventually concludes that is has to gnaw its own appendage off and worry about it later.