Ron Saba Thinks EK Not Appreciated Enough By Market

In an interview with Ron Saba, director of equity research at Horizon Investments, Seeking Alpha asked which the highest conviction stock position was in his fund.

Ron, who is a chartered financial analyst with more than 20 years of experience in fundamental research and the management of equity portfolios, said that his current single highest conviction holding was Eastman Kodak (NYSE: EK). While Kodak has been in existence since 1880, the recent years have been tough for the company, with digital imaging gradually replacing film. However, there is more to EK than just making film. Currently, there are three operating units - Consumer Digital Imaging Group (CDG); Film, Photofinishing and Entertainment Group (FPEG); and Graphic Communications Group (GCG).

Ron added, “Most analysts still hold the traditional view of the company - including that the decline in traditional film will continue to devastate Kodak, and the stock has suffered.” However, in 2003, EK started turning its focus on “large growth markets that are positioned for technology and business model transformation.” “Management is focused on maintaining profitability of the declining traditional film and paper business by continuously reducing its cost structure while simultaneously growing high-margin digital products businesses.”

When asked about the catalysts for EK, Ron said that the market was beginning to appreciate Kodak’s valuable intellectual property portfolio. In December, Kodak and Samsung entered into a technology cross-license agreement after EK filed a complaint with the International Trade Commission (ITC) in November 2008 for the infringement of patents related to digital camera technology. EK also inked a technology cross-license agreement with LG Electronics in November 2009. “Revenue from these cross-license agreements alone could total $450 million in 2010.”

EK also filed a complaint with the ITC against Apple (NASDAQ: AAPL) and Research in Motion (NASDAQ: RIMM) in January as well as two suits against AAPL. A win for Kodak against Apple and/or RIM could translate into a more than 100% jump in royalty revenue.

Kodak’s All-in-One printer business is growing rapidly. “Sales more than doubled last year (2009) and could double again in the next two years,” Ron mentioned. EK has a healthy order backlog for the recently introduced Prosper color digital printing press. Revenues from the Prosper line could reach $500 million by 2012 and $1 billion by 2014.