Is Kodak (NYSE:KODK) a viable play on the novel coronavirus? Speculators thought so late last month. Kodak stock went parabolic on news the company was going into the drug ingredient business via a U.S. government loan. Shares skyrocketed from just above $2 per share, to prices as high as $60 per share, before closing at $33.20 per share on Jul 29.
But, since the start of August, shares have fallen back to earth. Shares now trade around $15 per share. So, was there merit to Kodak’s pandemic catalyst? Or, did fools rush into what was a “sucker’s bet?”
I’m leaning towards the latter. Granted, any news is good news for forgotten dinosaur Eastman Kodak. But, this latest development does little to change the game for this once-great company.
In the five years preceding July’s announcement, Kodak stock lost more than 80% of its value. And with good reason. Filing for bankruptcy in 2012, the company emerged out of Chapter 11 in 2013 a shell of its former self. As digital photography made its legacy film business obsolete, it offered very little that could wow investors.
As a result, the company has resorted to flash-in-the-pan efforts to breathe life into Kodak stock. Before this recent gambit, it was the company’s 2018 attempt to get get into cryptocurrencies. And, like the failed crypto effort, this latest scheme will fizzle out as well.
In short, stay away, very far away.
This Latest Gambit Won’t Pan Out for Kodak Stock
So, what exactly is Eastman Kodak’s latest endeavor? With the proceeds from its Defense Production Act financing, the company will start producing ingredients for generic drugs. That’s nothing to get excited about. This is a commodity business, with low margins and high competition.
Granted, the U.S. government is backing the company in order to reduce America’s dependence on China and India for pharmaceutical ingredients. But, even that doesn’t guarantee they’ll turn this into a profitable business. Add in the fact it’ll take time for the company to get Food and Drug Administration approval as an ingredient supplier, and this is far from being a slam dunk.
Even if this gambit is a success, it’ll do little to move the needle further. Sure, this new business unit may wind up becoming 30-40% of Kodak’s overall business. But, the recent run-up more than prices-in this long-shot catalyst.
Yet, speculators, buying on headlines, didn’t care about the details. That’s why shares hit prices as high as nearly 30-fold in the days following the announcement. But, as investors read the fine print, shares are heading back to earth.
And chances are, Kodak stock heads even lower. Why? Beyond today’s seemingly hot catalyst, this has-been company offers little else to get excited about.
There’s Little Else to Get Excited About
Beyond the latest move into the drug business, what else does this company bring to the table? Very little. If anything, the rest of the company offers more in the way of risks than catalysts.
Firstly, the company’s current operating businesses are low margin, and aren’t growing. Expect their legacy operations to continue to deteriorate.
Secondly, severe dilution from an upcoming bond conversion. $100 million in outstanding debt will soon become 30 million shares in Kodak. Considering right now the company has 43.75 million shares outstanding, that means your piece of the pie is about to get much smaller.
In other words, even if the generic drug ingredient gambit pays off, the upside potential in Kodak stock is much less than before.
And, that’s not all. Add in other obligations (pension liabilities, preferred stock), and there are too many red flags to even consider this a long-shot opportunity.
Bottom line: there’s very little to support the company’s valuation at today’s prices. Even as shares have fallen from their recent highs. It seems almost certain Kodak shares will tumble back to the single-digits.
Don’t Waste Your Time With Kodak
Despite the epic run of Kodak shares after last month’s announcement, there’s very little to get excited about when you drill into the details. The potential upside from entering the generic drug business isn’t that big.
Even with the current administration interested in bringing generic drug production back to the U.S., the company still faces stiff competition. Add in the upcoming dilutive debt conversion, and it’s unlikely shares will head higher. Much less hold on to what’s left of their gains.
Bottom line: don’t waste your time with this sucker’s bet. Stay away, far away, from Kodak stock.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.
