Eastman Kodak (NYSE:KODK) has had a long slow fall from grace. Since missing the evolution to digital photography, Kodak has struggled. The company filed bankruptcy 2012, and since emerging from reorganization, it has desperately swung from one half-baked business strategy to the next. For example, the less said of 2018’s Kodak cryptocurrency, the better. However, Kodak stock enjoyed one last surge earlier this year in hopes that the firm could evolve into a player in the health care industry with a particular emphasis on the Covid-19 virus.
Back in July, the Trump Administration awarded Kodak a $765 million loan in return for producing chemicals needed to speed along Covid-19 vaccine development. However, that loan almost immediately became embroiled in controversy. In the end, the government slammed the brakes on the offer. While KODK stock has fallen sharply since then, in all honesty, it should be down even more.
Trump Administration Was Concerned
This Kodak loan agreement seemed like a mess almost from the beginning. It was never clear why Kodak was the best partner for making these chemicals, as Eastman Kodak hadn’t been in that line of business recently.
And in particular, the trading around Kodak stock was suspicious. Kodak shares spiked a day before the loan agreement was announced, raising questions about whether Kodak executives had leaked the news. Commenting on these concerns, key Trump Administration official Peter Navarro indicated that Kodak had screwed up and was now out of the government’s good graces. Specifically, in an interview with CNBC, Navarro slammed the company:
“What happened at Kodak was probably the dumbest decisions made by executives in corporate history […] We don’t why that happened or what they did. Let the investigation happen, Kodak is doing an internal one as well. But we’re moving forward, we’re not looking in the rearview mirror.”
From that comment, you can see pretty clearly that the Trump Administration already felt burned by Kodak awhile ago. The loan is not going to come to fruition, and thus the whole reason for the Kodak stock spike this summer was baseless. To put the cherry on top, Navarro concluded that interview by saying: “Kodak, I mean, you can’t fix stupid. You just can’t. You can’t even anticipate that degree of stupidity.”
Biden Administration Won’t Be Kinder
Even though the Trump team quickly distanced itself from Kodak in the wake of the scandal, traders still had some residual hope that Kodak would still get federal aid. It fit with the Trump narratives about having a level playing field for historically great American companies, and bringing vital manufacturing processes back to the United States from far-flung overseas locales.
Unfortunately for Kodak stock holders, there’s no reason for a forthcoming Biden Administration to take a similar view. And without the loan agreement, there’s little reason to think Kodak is going anywhere.
In fact, the whole pivot to chemicals idea was a bit strange from the outset. Keep in mind that Kodak spun off its separate chemical business ages ago into Eastman Chemical (NYSE:EMN). While Eastman Kodak went bankrupt in the 2010s, Eastman Chemical has been highly successful as a standalone entity. Thus, there’s little reason to involve legacy Eastman Kodak in any Covid-19 chemical play except for the brand name and headline-grabbing press releases.
As it stands, Kodak’s revenues from its core business continue to plummet. For last quarter, revenues slumped to $213 million, down from more than $300 million for the same period last year. Not surprisingly, the company’s profitability metrics are sliding as revenues dry up. Kodak has slashed costs to try to stem the decline, but it probably won’t be enough. Of particular concern, Kodak is now spending just $8 million per quarter on research and development; that’s a drop of more than 50% in recent years. It will be hard for Kodak to innovate on that sort of budget.
Kodak Stock Verdict
Kodak stock was trading for around $2 per share prior to announcing the funding from the government. Now that this loan agreement has collapsed, you’d expect Kodak stock to be back to $2 per share or less. Instead, it’s still trading for $6. This makes no sense whatsoever.
The Biden Administration has no reason to try to help Kodak now that it is tied to a Trump-era scandal. And it’s unclear what else could possibly save the company. Kodak’s recent moves, such as the Kodak cryptocurrency, reek of desperation. Now, with a scandal even as the business continues to decline, it seems clear that Kodak stock will continue to plunge. Kodak shouldn’t trade for any more than $2/share, which leaves dramatic downside from current levels.
On the date of publication, Ian Bezek held a long position in EMN stock.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.
