Why Eastman Kodak Is Headed to Zero

Eastman KodakEastman Kodak’s (NYSE:EK) shares were off 23% on Monday amid the company’s latest ugly news that it had tapped into $160 million from its credit line for “general business purposes” — prompting fears the company is preparing for the worst.

With the stock down 66% this year to below $2, you’d have to ask yourself, “How much worse can things get?”

To be blunt, it can get as bad as bankruptcy — and probably will sometime in the next few years. The struggling company is running out of time. Barring some groundbreaking change, Kodak eventually will go to zero because of weak sales, poor brand image and a generally inhospitable economic environment.

Bloomberg reports that credit-default swaps on Eastman Kodak are up 2.2 percentage points to a 41% upfront cost as a result of Monday’s mayhem. That means investors must front $4.1 million initially, then pay $500,000 annually to protect against $10 million of Kodak’s debt. A steep premium like that tells you how optimistic Wall Street is about Kodak’s future.

It’s safe to say that “death spiral” is as good a phrase as any for the company’s recent financial performance. Its “best” year in recent memory was 2008, where it managed to post one good quarter and squeak out a full-year profit.

Some might think it’s hasty to write off Kodak just yet, since a lot of the damage in recent years has been because of costly layoffs and corporate restructurings. In fact, its fiscal 2010 results reflected successful investments emerging markets as well as intellectual property licensing agreements, to say nothing of leaner operations and bigger margins. A look at the company’s balance sheet shows nearly $1 billion in cash and short-term equivalents as of June 30, 2001, so it’s not like Kodak won’t be able to keep the lights on tomorrow.

However, many brand studies show consumers think Kodak is a stodgy film-and-negatives company. It might never be seen as a premium option in the digital media world. A decade ago, Interbrand ranked Kodak as the 16th most valuable brand in the world, worth $14.8 billion. Every year since, the Kodak brand has fallen in both rank and value.

Throw in a tough consumer spending environment, and sales growth is going to be very difficult to come by.

Jeff Reeves is the editor of InvestorPlace.com. As of this writing, he did not own a position in any of the stocks named here. Write him at editor@investorplace.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.

Article printed from InvestorPlace Media, https://investorplace.com/2011/09/eastman-kodak-credit-ek-shares/.

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