Even by the standards of a wild market year, Kodak (NYSE:KODK) stock still stands out. Why is Kodak stock noteworthy, you might ask?
Well, the company came into the year strong, with an over 30% rally in the last three trading sessions of 2019. In the first four sessions of 2020, the stock promptly gave back those gains, and then some, as it neared $3.
By the lows of the March sell-off, Kodak stock had lost another 50% plus. The stock recovered somewhat, but closed at $2.10 on July 24. Then the insanity started.
KODK stock rose 25% the following trading day on July 27, for reasons that weren’t immediately clear. But the reason soon came out the next day: Kodak climbed 203% after announcing it had received a $765 million government loan. The loan aimed to back a new Kodak business which would produce ingredients for generic drugs.
On July 29, the rally continued. At one point, the stock hit $60 — which represented gains of more than 2,900% in just two and a half sessions.
And then the bottom fell out. The rally started to fade on its own accord. Then politics got in the way.
Allegations of insider trading began to proliferate (owing at least in part to the July 27 rally). As a result, the agency making the loan put the agreement on hold. The company lost half of its value in a few sessions, falling back below $10. It’s traded mostly sideways — albeit in a volatile fashion — since.
Yet, after that intense roller-coaster ride, KODK has actually managed to have a decent year. It’s gained over 90%. But I’m skeptical those gains will hold.
Kodak Stock and the Legacy Business
For all the hype over the pharmaceutical efforts, that’s not actually a business yet. What Kodak is now is a version of the long-running, well-known, photography business. And that’s simply not a very good business.
In 2012, Kodak famously went bankrupt. Now the reorganized business is heading in the wrong direction. Revenue declined 6% year-over-year in 2019. EBITDA (earnings before interest, taxes, depreciation and amortization) even at the segment level was just $12 million, about 1% of sales.
Put simply, there just doesn’t seem to be a lot of value in the business. It’s not growing. It’s not particularly profitable. And neither of those problems seems likely to get fixed.
Most of the company’s revenue comes from printing, where demand was receding even before the novel coronavirus pandemic. And with the pandemic accelerating adoption of technologies like e-signatures and online shopping, that trend is likely to get worse.
Kodak has tried to find growth. For instance, it attempted to develop KodakCoin with a partner. And while I’m a bull on cryptocurrencies, KodakCoin unsurprisingly hasn’t found adoption.
Kodak has a 3D printing offering as well. But investors shouldn’t pin their hopes on that effort: it generated just $3 million in revenue in 2019. The business was folded into a larger segment this year, but there’s no sign performance has improved.
Again, KODK traded at $3 at the start of the year. It had a market value under $150 million. Looking at the numbers, and the outlook for the business, even that value for the legacy business looks potentially aggressive.
Can Generics Save Kodak?
Yet Kodak now has a market capitalization over $650 million. That’s because convertible bondholders exchanged their notes for shares, which boosted the share count to roughly 75 million outstanding.
It’s up to the pharmaceuticals business to support that valuation. And, to be fair, there has been some good news on that front.
Just this week, CEO Jim Continenza said at a Wall Street Journal conference that the company would move forward with or without the loan. Last month, an internal review by an outside law firm also found that Kodak employees committed no wrongdoing, though errors were made.
So there’s hope — perhaps. But there are problems, too.
The first is whether even a successful pharmaceutical business has all that much value. Generic drugs are not a hugely profitable business.
The second is the political climate. Kodak reportedly was going to make ingredients for hydroxychloroquine, a potential Covid-19 treatment long touted by President Donald Trump. But many doctors are more skeptical, and a change in the White House could undercut optimism toward the drug. Meanwhile, some Democrats aren’t even completely sold on the results of the internal review.
It’s not clear who’s right. But from an investment standpoint, “right” isn’t really what matters. What matters is that the company has become a political football weeks ahead of what will be enormously contentious elections.
That’s not a good place to be. Yet Kodak stock seems to be ascribing roughly $500 million in value to a business whose prospects rely on at least some government help. Kodak may move forward with pharmaceutical ingredients, but $180 million in cash on hand is not enough to go full-bore into that business.
After all, if the opportunity was that attractive, and if that cash was enough, Kodak would have gone in the drug direction on its own. The fact that it didn’t suggests investors should proceed with caution, now that it has to enter pharmaceuticals alone.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
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