Kodak’s New Business Model Is a Frame-able Moment

Eastman Kodak (NYSE:KODK), a shining star in the film industry known for its disposable cameras and “Kodak moments,” fell off the bandwagon when the iPhone took its place in the mid-2000s. However, Kodak stock is back in the spotlight and made major news headlines last week.

two Kodak (KODK) branded photo rolls

Source: Rizhka Nazar / Shutterstock.com

While Kodak will no longer be in the business of printing photographs, the company received a $765 million loan from the U.S government to prioritize the production of drug ingredients. This move comes after Congress made the decision to manufacture more generic drugs in the U.S to combat Covid-19.

Loss-making Kodak stock saw a major windfall after the deal was announced. If you’ve been holding off on buying this stock for the last few years, now’s your time to jump in.

Drug Manufacturing Goes Domestic

For many years, drug manufacturing in the U.S was largely outsourced to countries like India and China. However, the onset of the pandemic revealed cracks in the healthcare supply chain as America found itself unable to produce the raw materials required for masks and medical equipment.

In an effort to fix this costly problem, the government decided to onshore drug manufacturing at prices that were competitive with those abroad. As part of the Defense Production Act (DPA), numerous companies were awarded contracts to manufacture the drugs required to combat Covid-19.

While most contracts were sanctioned to Biopharmaceutical companies, the government announced that Eastman Kodak would receive a $765 million loan to produce drug ingredients as well. The move came as a surprise to many investors and analysts.

Kodak was once a major player in the photography business, but lost its allure when it failed to jump on the digital camera trend in the early 2000s. When Apple (NASDAQ:AAPL) captured a majority of the camera market with the release of the iPhone, the 131-year old photo leader’s core product became redundant overnight. Kodak filed for bankruptcy in 2012.

However, the drug manufacturing grant will serve as a lifeline for the company. The chronic shortage of drugs in the U.S and the government’s efforts to “make America the world’s premier medical manufacturer and supplier” will be a boon for Kodak stock. The company plans to expand its factory operations in St. Paul, Minnesota and Rochester, New York for the production of pharmaceuticals.

The loan is a major turning point for the U.S. government because it is the first of its kind under the Defense Production. Investors reacted well to the news and Kodak stock jumped from a low of $2 to $60 last week — a whopping 300%.

A Picture-Perfect Deal

As investors continue to search for an ounce of stability in an increasingly volatile corona-economy, Kodak stock may be the diamond in the rough. The company’s drug manufacturing grant led the stock to surge by more than 1,300% during the week. Kodak’s market valuation hit $1.5 billion just three days after the deal was announced.

The company’s trading activity last week was off the charts and a far cry from Kodak’s stock performance since its bankruptcy. On the day of the announcement, nearly $1.65 million Kodak shares changed hands and continued to do so at 14 times the daily average over the next 10 days. By Wednesday, $10.9 billion worth of KODK stock has been traded.

The biggest winner of Kodak’s unexpected resurgence is the company’s Chairman, Jim Continenza. In early 2019, the Chairman was granted stock options on $2.05 million shares that had a price ranging from $3.03 to $12. The options were not worth much at that time, given the stock was only trading at $3 per share.

However, Kodak’s recent stock movements resulted in a $95 million gain for Continenza, should he choose to exercise his stock options. But the executive believes in the future of Kodak. In a statement to the Wall Street Journal, Continenza said that he never sold his Kodak options before and has no intention of doing so in the future.

The Bottom Line on Kodak Stock

Strange pivots in companies’ business models are not uncommon, but Kodak’s case is a bit different considering the transition is a result of a loan sanctioned by the DPA. However, this isn’t Kodak’s first foray into pharmaceuticals. According to CNBC, the company was involved in the production of generic medication like aspirin in the 1990s but sold this business unit to GlaxoSmithKline Beecham (NYSE:GSK) in 1994.

Although Kodak stock’s sudden rise resulted in incredible gains for traders, some investors have cast their doubts on its future growth. Many believe the company’s market valuation rose too high, too fast and could come crashing down at a moment’s notice.

Nevertheless, Kodak’s government-backed loan puts them in a great position to make waves in the pharmaceutical industry. While the stock price is unlikely to hit its low of $2 per share, investors can expect greater volatility in the coming weeks and months. Tread carefully.

Divya Premkumar has a finance degree from the University of Houston, Texas. She is a financial writer and analyst who has written stories on various financial topics from investing to personal finance. Divya has been writing for InvestorPlace since 2020. As of this writing, Divya Premkumar did not own any of the aforementioned stocks. 

Article printed from InvestorPlace Media, https://investorplace.com/2020/08/kodak-stock-new-business-model-is-a-frame-able-moment/.

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