The recent surge in Eastman Kodak (NYSE:KODK) is almost cinematic. People seem to imagine KODK stock rising from the depths to its former greatness through grit and determination alone.
Who doesn’t love a good comeback story, huh? Whether it’s Rocky or The Karate Kid, we have fond memories of cheering on as our favorite protagonist tries to mount a recovery against insurmountable odds. But the best comeback stories have a tinge of realism to them.
That’s why KODK stock strikes me as unrealistic and unreasonable.
Like any bad movie, you don’t understand the characters’ motivations, and there is no story to latch onto. Plus, as ace investor Matt McCall puts it, it isn’t 1995–the last time the company was relevant. Shares reached a brief high of over $30 on the news that the U.S. government will extend a loan to produce pharmaceutical ingredients.
However, on August 8, the agency responsible for making the loan to Kodak tweeted that they would not proceed with the loan at this time. This came just one day after the company said it was investigating allegations of insider selling. But this article is not about that loan.
Instead, it builds a case why Kodak has been an ailing company for a while and why a blip in stock performance should not entice retail investors to rush in at this time.
Politics Backfired for KODK Stock
There is a real danger in using political developments to play a stock because political support is subject to change.
Earlier this year, the White House announced Kodak would get a $765 million loan under the Defense Production Act intended to “transform Kodak into a pharmaceutical company that can help produce essential medicines in the United States.” That sent shares skyrocketing.
But as I have already said, politics are dynamic. When it emerged Kodak board members had purchased additional shares before the loan announcement, the federal agency halted the loan. Sen. Elizabeth Warren was one of the first senators to comment on possible insider trading.
Senior Democratic lawmakers soon chimed in, asking federal regulators to examine securities transactions made by the company and its executives when it learned it could receive government loans.
Now that the Democrats have the White House, it seems further unlikely that Kodak will see that loan money. There was already skepticism of whether the company, having no history of pharmaceuticals, can transform itself in short order to help in the fight against the novel coronavirus pandemic. The legal issues add to the headaches.
A Loan Is Not a Panacea for Weak Fundamentals
You can call me old fashioned, but I value fundamentals over anything else. Operating results over the last several years have raised some serious questions about the viability of this business. The company’s recent quarterly results required a going concern notice.
Net loss would have been $32 million were it for the positive contribution from Pension Income. Taking everything into account, net loss came in at $5 million.
But the recent quarterly results are not an anomaly. Rather they are part of a consistent trend of poor results. Several analysts are wondering whether the company will file for bankruptcy again.
In 2012, Kodak filed for Chapter 11, announcing it would stop making digital cameras, pocket video cameras, and digital picture frames and focus on the corporate digital imaging market.
Thereafter, the company began focusing on its major business segments; Print Systems, Enterprise Inkjet Systems, Micro 3D Printing and Packaging, Software and Solutions, and Consumer and Film.
Still, the financial results didn’t improve, and operating metrics reflect this reality. However, with current assets and current liabilities standing at $579 million and $275 million, respectively, as of the last quarter, I don’t believe that the company is in danger of filing for Chapter 11 again.
But the investigation surrounding the board of directors is a scandal waiting to happen. Legal expenses notwithstanding, the reputational damage is not something any investor in KODK stock will want exposure to.
My Final Word on KODK Stock
Writing about Kodak stock brings back a lot of memories. Its “Kodak moment” tagline is still iconic in my eyes, and there’s a lot of nostalgia when you speak on the company. But Kodak is more of a cautionary tale these days.
Its work cut out to revive its financials, a tough task considering the economy’s general state post-Covid-19.
The loan gave Kodak stock a brief shot in the arm. But it shouldn’t be seen as the answer to all its problems. And with the change of administration now taking place, I don’t think there are any chances of the company getting that lifeline soon. Bottom line, avoid Kodak stock now and for the foreseeable future.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. He has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.