Seeking Alpha
Long only, deep value, growth at reasonable price, carmakers
Profile| Send Message|
( followers)  

As my last two articles compared Nokia (NYSE:NOK) to Ford (NYSE:F), I had a number of readers tell me that Nokia is more comparable to Eastman Kodak (EKDKQ.PK) than Ford. Of course, I don't agree with this, and I will explain why in this article.

For many years, Eastman Kodak was a major player in the photography business. The company sold high quality photography and imaging equipment, including cameras and photography printers. In 1970s, the company was a huge success, as it had a market share of 90% in its industry. After 1990s, when digital cameras were in the market, Eastman Kodak was too late to realize that people would stop using regular cameras with films forever as digital cameras were revolutionary. The company was caught far behind the competition, it was reluctant to change its ways and stubborn about trying new things. Ironically, Kodak was the first producer of digital cameras as early as 1970s; however, the company had discontinued producing those cameras, fearing that it would kill the company's printing and film sectors. By 2000s, the market for digital cameras was too crowded, and the profit margins were too low for most of the companies competing in the market. Kodak spent most of 21st century burning through its cash reserves until the company filed for bankruptcy recently.

In 2008, Eastman Kodak reported a loss of $442 million, followed by a loss of $210 million in 2009, another loss of $687 million in 2010 and further loss of $764 million in 2011. Eastman Kodak hasn't made a single dollar of profit in years, and the company waited for things to fix themselves for years until it was too late.

Nokia is a completely different story. Many people think that Nokia's current cash-burn is an ongoing problem but this is not true. Nokia has been profitable for the 5 of the last 6 years. The company earned $7.41 billion in 2006, $11 billion in 2007, $6.37 billion in 2008, $1.17 billion in 2009 and $2.21 billion in 2010. All these numbers are before taxes, and I used exchange rate of $1.3 per Euro for the calculation. Still, Nokia had been profitable until last year. Even last year and this year, the company comes near even if we exclude one-time charges related to restructuring of the company.

Another reason Nokia can't really compare to Eastman Kodak is that the two companies enjoy different markets. Eastman Kodak faced too much global competition, as in there were too many major players in the market. Not only there were a lot of digital camera makers, but also many cell phones and similar devices also came with a camera, making buying a digital camera less desirable. Due to the competition, digital camera market was a slow growth market with very low margins. On the other hand, cell phone market, particularly smart phone market, is a fast growth market with high margins. It is possible to build a smart phone for $150 and sell it for $600-700, partly thanks to subsidies offered by the service providers. Eastman Kodak never enjoyed this benefit. Yes, there is a lot of competition in smart phone market too, however, this particular market is growing fast, and there is room for all the major players, unlike the digital camera market.

Furthermore, Nokia's latest products got overwhelmingly positive reviews, helping the company regain some of the lost market share in the smart phone industry. Even the competitors admired Nokia's latest phone as Apple's (NASDAQ:AAPL) co-founder Steve Wozniak couldn't hide his admiration for Lumia 900, stating that the phone is comparable to Apple's Iphone in every way. I don't remember a time in the last 5 years when Eastman Kodak came up with a product that gained overwhelmingly positive reviews both from friends and foes.

Another thing Nokia enjoys that Eastman Kodak was never able to enjoy is backing and support of two giant corporations, Microsoft (NASDAQ:MSFT) and AT&T (NYSE:T). Both companies are heavily marketing Nokia's newest phones while Microsoft is even paying Nokia as a part of partnership of the two companies. Many people believe that even if everything went bad, Microsoft could still "bailout" Nokia with its cash reserves.

I agree that Nokia is late in the game of smart phones, but I don't agree that it is "too late" in the game. Apart from US and Western Europe, very few people in the world actually have exposure to a smart phone and there is still plenty of market share to gain. Besides that, I believe that Nokia's tablet will be success too.

Source: Why Nokia Isn't Eastman Kodak