American businesspeople tend to be optimistic. No one wants to project their business is declining, and they use all kinds of changing benchmarks to make it appear like their business is improving — even if it’s not.
Case in point – Kodak. From peaking near $95/share in the late 1990’s, by the time Kodak was removed from the DJIA (4/2004) it’s value had plummeted 75% to around $25. But then Kodak’s stock recovered to $35 as its executives talked about their turnaround plan. Ever optimistic, Kodak said it wasn’t too late for them to move into digital imaging. But now the stock is back down to $25. Reports about the company’s performance are horrible. Sales of conventional film fell 30% in the U.S. this year. Employment peaked at 145,000 in 1988 and now is 50,000. And $3B of "turnaround acquisitions" have raised costs more than margins. The fact is that Kodak is in the Whirlpool – and Kodak is far more likely to follow Polaroid into the history books than ever regain its lost value.
Much is likewise true at Sears. After the company was removed from the DJIA in 1999 it became much more obvious to everyone that Sears was in a non-recoverable tailspin. In 2004 real estate developers determined the company’s stores were worth more empty than as Sears stores. Nonetheless, there are those who still claim Sears Holdings will be saved by Mr. Eddie Lampert – the acquirer of the old Sears.
But, by June of 2005 Sears was forced to slash its advertising. Then in early September Mr. Lampert fired the CEO at Sears (Lacy) in a move to demonize someone and hold out hope for a Sears turnaround. And now the company is planning to cut benefits for all its retirees in another effort to save its P&L. Sears is quickly moving further into the whirlpool, destroying shareholder value with each day it invests in maintaining its old, broken Success Formula.
While "hope springs eternal from the human breast", for investors (and managers) it’s much smarter to recognize a business in the Whirlpool early and manage the exit to get as much cash as possible.