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Investors in Eastman Kodak (NYSE:EK) have seen the value of the stock decline by more than 25% over the last few weeks, as the company was stung by an adverse legal decision and an abysmal earnings report. Is this the beginning of the end for this storied American company or an entry point for an investor not afraid to go against the consensus?

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Earnings Miss
Eastman Kodak reported fourth quarter earnings and fell short of analysts' estimates on earnings and revenues. The company reported revenues of $1.93 billion compared to consensus of $2.11 billion. Earnings came in at a loss of ($0.37), far short of the expected loss of ($0.02).

Intellectual Property
This was the second blow to Eastman Kodak in a week, as the U.S. International Trade Commission (ITC) ruled a few days earlier that one of the company's patents was invalid due to obviousness. Licensing intellectual property is part of the company's strategy and was used to provide income while its other businesses were struggling to return to profitability.

The ITC had previously ruled the same patent valid and Eastman Kodak signed licensing deals with several companies. The case came before the ITC again because the company is in litigation with Apple (Nasdaq:AAPL) and Research in Motion (Nasdaq:RIMM) over the patent. There is still a chance that the patent will be ruled valid as this decision was only an initial determination, and Eastman Kodak will no doubt petition the full ITC Commission to rule on it.

Investors seem to hate Eastman Kodak's intellectual property business because of the volatility of revenues, but other companies have made the licensing of intellectual property an important part of the company. IBM (NYSE:IBM) generates in excess of $1 billion per year in this business.

Analyst Meeting
Eastman Kodak held an analyst meeting recently, and outlined its strategy to transform itself to a "digital company with sustainable profits" by 2012. This strategy is based on continued growth of these digital businesses leading to profitability in 2012.

Digital Anyone?
Eastman Kodak lumps all of its "digital" businesses into the Graphic Communications and Consumer Digital segments. The Graphic Communications segment reported revenues of $2.7 billion in 2010, and includes services and products geared toward businesses.

The Consumer Digital segment also had revenues of $2.7 billion in 2010, and includes the printer and consumer digital photography business. Eastman Kodak is estimating a 4% compound annual growth rate in revenues through 2013 in these two parts of its portfolio.

Eastman Kodak's traditional film businesses are in the Film, Photofinishing and Entertainment segment. The company expects revenues to decline by a compound annual growth rate of 16% through 2013.

Core Digital
Eastman Kodak is basing a return to profitability on the Consumer and Commercial Inkjet, Workflow Software & Services, and Packaging Solutions parts of its digital portfolio. These areas of the company grew revenues by 18% in 2010, and the company expects revenues from here to reach $2 billion in 2013.

One fast growing part of the company is consumer inkjet printers, where Eastman Kodak is rapidly growing its base of printers. The company reported a 45% increase in printer shipments in 2010, and expects 50% growth in 2011.

Unfortunately, this is a highly competitive business, and Eastman Kodak faces competition from PC manufacturers like Dell (Nasdaq:DELL) and Hewlett Packard (NYSE:HPQ), which make its own line of printers, as well as companies like Lexmark (NYSE:LXK), that focus solely on this product.

Eastman Kodak doesn't expect to earn a gross profit here until the second half of 2011, and the company expects positive operating earnings to be achieved in 2012.

The Bottom Line
Investors willing to take a risk might want to research Eastman Kodak as the company reels from various bits of bad news related to its intellectual property business and earnings shortfalls. (For related reading, also take a look at Patents Are Assets, So Learn How To Value Them.)

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