Miller's gamble

Baltimore's No. 1 investor is backing a bold bid by Kodak executives to rescue the company from its long slide

December 05, 2003|By BLOOMBERG NEWS

Money manager William H. Miller III, whose Baltimore-based Legg Mason Value Trust is set to outpace the Standard & Poor's 500 index for a 13th straight year, is betting Eastman Kodak Co. will help extend his record.

The $13.1 billion Legg Mason fund had at least 2.5 percent of its assets, or more than $325 million, invested in Kodak as recently as October. Miller is backing Chief Executive Officer Daniel Carp's plan to transform Kodak into a top supplier of digital-imaging equipment, even as investors such as Herb Denton of Providence Capital Inc. call for a possible breakup of the company.

"Miller is the kind of manager where you have to fasten your seatbelts because you're going to be in for a ride," said Geoff Seaborn, treasurer at Trinity College in Toronto, who helps oversee the school's $38.5 million endowment and hired Legg Mason in 2001 to manage U.S. stock investments. "He's not always right but he's done pretty well."

The 53-year-old Miller and his 16-person team of fund managers and analysts invest in stocks they expect to rise more than the S&P 500. Miller ignores many of the typical benchmarks used to measure whether shares are cheap. For instance, he has a stake in Internet retailer Inc. even though the stock has a price-to-earnings ratio that's quadruple the market average.

When one of Miller's stocks falls, he often buys more. He doubled his stake in power-supplier AES Corp. to about 55 million shares during 2002 when the stock fell 83 percent. This year, AES' stock has tripled. Miller started buying Kodak shares in 2000 when the stock was trading at $60. It closed yesterday at $23.90.

"He has the courage of his convictions," said Nancy Dennin, who helps manage the Legg Mason fund and has worked with Miller for 18 years. Shares of Kodak, which cut its dividend for the first time ever in September, will outperform the S&P 500 during the next three to five years, she said.

"The value of Kodak is higher than where it's currently trading," the 43-year-old Dennin said in an interview. "That value will be evident in the next 12 months."

The Legg Mason fund's streak of beating the S&P 500, the mutual fund industry's longest, has helped its assets balloon by more than 20 times since the end of 1990. This year the fund has gained 36 percent, compared with the S&P 500's 21 percent advance.

For Miller, who has managed Value Trust since 1982, maintaining the performance may be crucial as investors across the United States grow increasingly concerned about the broadening investigation of improper trading and sales practices in the $7.1 trillion fund business.

Legg Mason said Nov. 14 that the company faces possible regulatory action and a proposed fine of $2.3 million over allegations that it overcharged customers for some fund purchases.

Miller's team is predicting that the S&P 500 will rise 5 percent to 7 percent annually for the next five to 10 years, roughly matching the index members' expected profit growth during that time, Dennin said. With a dividend yield of 1.6 percent, the total return probably will range from 6 percent to 9 percent a year, she said.

Kodak's lower dividend means its stock will have to outperform the S&P 500 by a wider margin to keep the fund from selling its stake, Dennin said. Shares of Kodak have declined 32 percent this year, the worst performance among the Dow Jones industrial average's 30 members.

Kodak cut its annual dividend to 50 cents a share from $1.80 to help pay for purchases and other investments, company spokesman Gerard Meuchner said.

The company's earnings fell to $2.70 a share last year from $5.03 in 1999. Kodak predicts a 2003 profit of $2.10 to $2.20 a share, and said its earnings may exceed $3 by 2006.

Kodak had the outlook on its credit quality changed to negative Nov. 26 from stable by Standard & Poor's, which said acquisitions may prevent the company from reducing debt.

The Legg Mason Value Trust Fund held 13.7 million Kodak shares Sept. 30, and added an undisclosed number of shares in October.

Miller met with Kodak executives before and after the company announced its strategy shift and dividend cut on Sept. 25, Dennin said. He also has visited with investors who oppose the plans.

Carp has sought to marshal support for his strategy from investors such as billionaire Carl Icahn. Icahn has been buying Kodak shares and now owns 1 percent to 2 percent of the company, The Wall Street Journal reported, giving as its source an unidentified person close to the matter.

Nothing has persuaded Miller's team to replace its Kodak stake with another stock, Dennin said. While it's too soon to tell if Carp's push into digital imaging will work, "a year from now, you should see the strategy start to unfold," she said.

"Every stock we're looking at has to have what we believe is better potential than stocks already in the portfolio," Dennin said.

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