Betting on Dell, Against Kodak

It’s every investor’s dream: to unearth a robust corporate turnaround, especially one that could send the stock soaring.Throughout her 27-year career, the skipper of Gramercy Capital Management, Joan Lappin, has called her fair share of turnarounds, among them Motorola, Tidewater, Magna International, Nextel, and Broadwing.In recent months, she explored what many are hailing as similar prospects, Eastman Kodak and computer biggie Dell Corp., wellknown corporate brands whose stocks have been stuck in the mud for years.After doing her due diligence, Ms. Lappin, who manages some $20 million of assets and is up this year in the upper-teens, came to the following conclusion — Dell yes, Kodak no.The last time I caught up with this veteran money manager was in January, when she vigorously recommended another turnaround — Zoltek Cos., a controversial maker of carbon fibers. A couple of short sellers (bettors on falling stock prices) lambasted me for publishing her bullish view of the stock. They ridiculed Ms. Lappin as a heads-in-the-cloud dreamer and branded the stock a dog. They were wrong. Zoltek at the time was $20; it’s now $32.57, up more than 50%.In mid-February, Dell announced that a former Motorola executive vice president, Ron Garriques, was joining the company as president of its mobile devices division. Impressed, Ms. Lappin, who had owned Dell about 10 years earlier and sold when it ran up, took a new position in the stock.She tells me a series of events have occurred or are occurring that lead her to believe that Dell ($24.85) is a significant comeback story and a potential 50% gainer over the next 12 months, after having languished in the investor’s doghouse in recent years because of flat sales and disappointing earnings. Here’s her rationale:• Founder Michael Dell, looking more fit and trim, has returned to the company as CEO.• Management has been strengthened by hiring former Selectron and EDS executives for key positions.• Efforts are under way to streamline operating costs, such as the announcement of new plants in Brazil, Poland, China, and India. Dell is also moving away from building to order to more efficient, standardized production.• The company, Ms. Lappin believes, is also nearing a resolution of its ongoing accounting problems with the Securities and Exchange Commission.An investment in Dell, she cautions, requires patience: “It’s not a quick turnaround, but a one- to two-year fix.” Noting that Dell, sitting with about $12 billion in cash, is pursuing a resumption of its growth path with increasing profitability, Ms. Lappin says she believes it’s on its way to achieving that goal. Goldman Sachs apparently agrees, having recently issued a buy recommendation on the stock.Kodak ($23.84), a one-time glamour name on Wall Street, has lost much of its luster, a victim of the swing to digital photography. It has lost money for several years running, and more of the same is expected in 2007 as it continues to be bombarded by year-in, year-out write-offs from plant and personnel reductions.With Kodak boasting one of the world’s best-known brands, optimists linger and every so often some analyst enthusiastically recommends the stock as a turnaround. So far, everyone who has done that has been dead wrong. Even Barron’s got caught in the turnaround trap a few years back. It pushed the stock enthusiastically, only to punish any of its readers who might have followed its advice.Legg Mason’s well-regarded value-oriented money manager, Bill Miller, also got sucked in — unfortunately big-time. He’s saddled with a 21% stake in the company.Ms. Lappin recently visited Kodak’s headquarters in Rochester, N.Y., to see if there was validity to a possible turnaround. She left uninspired. “I wouldn’t buy the stock because I don’t see any major turnaround,” she says. “The best you can hope for are signs of improvement, but even here, there are no guarantees.”Kodak is seeking to reinvent itself by moving into the hotly competitive area of color printers (now being sold at Best Buy) and the slow-moving graphic arts or printing business. Ms. Lappin’s reaction: “I don’t see them replacing Kodak’s lost film business.”Observing that the company is still playing defense by reducing operations, Ms. Lappin says she thinks “it’s going nowhere now.” She characterizes Kodak as “a show-me stock,” and as of now, she says, she sees nothing to suggest it’s headed back on a growth path.She’s hardly alone in her bleak outlook. The latest short interest in Kodak (a bet the stock will go lower) stands at a hefty 36.7 million shares, or 12.8% of the float.dandordan@aol.com

Betting on Dell, Against Kodak

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