Interview With a Short-Seller

Some smart investors argue that Kodak understands its position and has been working hard to reposition itself.

You can understand it, but it doesn't help. This is a business where the analog profitability was enormous, and the digital profitability is elusive. Kodak is spending billions of dollars to acquire companies in the digital area that arguably make no money. They're making digital cameras to compete with Canon and Sony (SNE Quote) and all of the major Asian producers. They have a great brand and have had some success building sales, but guess what: No one's making any money in cameras!

The bulls say, "Well, Kodak has health care and commercial imaging." But those are analog businesses too that are going to dramatically change. Talk to hospitals and you hear that once they get reasonably good images for X-rays and other imaging, they'll move to digital just as the consumer photography business has. Same thing with movies -- movie film is going digital.

How do you look at Kodak's valuation?

The consensus estimates have been around $2 per share in earnings this year and the stock is around $26, so [on a P/E basis] it looks cheap. But they've been making $1 billion in acquisitions a year just to keep their revenue base the same, which we argue would more appropriately be considered capital spending. Figuring depreciation with these acquisition costs as capex, we don't think they're earning any money at all. Shockingly, they also have some very high legacy retirement-benefit costs. There are a few billion dollars in off-balance-sheet liabilities.

We think Eastman Kodak is going to be a value trap all the way down, just as Polaroid was.

Any other broad categories where you find good short ideas?

Consumer fads. This is when investors -- typically retail investors -- use recent experience to extrapolate ad infinitum into the future what is clearly a one-time growth ramp of a product. People are consistently way too optimistic and underestimate just how competitive the U.S. economy is in these types of things: Cabbage Patch Kids in the 1980s, NordicTrack in the early 1990s and, more recently, Salton (SFP Quote) with the George Foreman grills.