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Eastman Kodak: With The Politics Over, It’s Not Worth It (NYSE:KODK)


Kodak World Headquarters Building

wellesenterprises/iStock Editorial via Getty Images

Politics

As I’ve discussed here before, a couple of times, there’s been a certain amount of political excitement concerning Eastman Kodak (NYSE: KODK). The Trump Administration, the Defense Production Act, a vast loan to Kodak to make the precursor chemicals for varied pharmaceuticals. Then the change of administration, varied hemming, and hawing about the loan. Management dumping stock into charitable foundations at the peak. The loan not coming through of course.

As an idea in the first place, it was slightly odd. Yes, sure, chemistry is chemistry, but there are very different lines within chemistry. Perhaps only politics could think that “Hey, it’s all just chemistry, right?” is the way to allocate capital to build a pharmaceuticals supply pipeline.

Anyway, that’s all over and done and gone with.

Which leaves Eastman Kodak as it is now

That original photography business got eaten by technological change. Ah well, that happens. So, what’s left? Other than a brand name to die for that is?

Well, there are still a few possible products from the old research labs which the company owns. There could be something in there. What the management thinks there might be is as follows:

Kodak discussion of technologies

Kodak technologies (Kodak management presentation via Seeking Alpha)

The thing about these is that they’re all perfectly respectable opportunities. Sure, some of them may work, some others not. We don’t know, as with any roll out of a new tech. But what we do know about them is that none are world changing technological opportunities. Perfectly respectable they may be, but none are about to set the world alight – even if they succeed. They’re just not in the right sectors to be that.

This does make a certain sense as they are those techs which were in the research labs but not picked up when Kodak was in its pomp. Even the old management would have had a better than evens chance of trying something that might actually produce a mass market.

Finances

Sure, Kodak’s got the resources to be able to bring one or more of these to maturity. Q1 is here in brief. Revenue is still a quarter billion a quarter, there’s cash in the bank. Losses are manageable. They’re not about to go to zero – they might over time but they’re not about to.

But

Effectively Kodak is now a very middle ranking corporate with a few maybe interesting ideas stemming from the old expertise in printing (transparent antennae and substrate coating are variations on printing, for example) but none of those ideas or even sectors are about to set the world alight. Where there could be a decent sized market – substrates say – there’s a lot of competition so margins will always be tight.

There’s nothing wrong with any of this. Except for this: “PE (TTM) 137.84” The future’s not just interesting enough to be valuing Kodak at that multiple of current (or even recent past) earnings. That transformational deal including the loan didn’t happen. Yet we seem to have a hangover for the equity valuation which still includes some idea that there is a transformational deal either happening or imminent.

I don’t see it. I do see a perfectly respectable business that could arise from these ashes. Well, you know, maybe and possibly. But nothing that is worth 137 times current earnings.

Sure and this is brusque

I’ve not delved deep into the details of earnings and so on simply because I don’t think that’s necessary to form a view. As I’ve said already it might well be that one or more of these technologies “works” in the sense of being profitable. But none of them are going to be – perhaps likely to be – at the sort of scale that justifies a PE of 137. That means that Kodak is currently overvalued.

I extraordinarily rarely recommend shorting a stock just because it doesn’t seem that the risks are viable for the individual investor. So, I’m not going to here. I’m sure there will be twists and turns in the Kodak story and possibly even in the stock price. But I cannot see anything here that supports the very high PE. Therefore, my expectation is that the price will decline.

My view

Kodak simply is not worth what the market currently prices it at. So, at best, sell and invest elsewhere. I could be wrong, of course I could, possibly one of these technologies is about to storm the world. But I really don’t think so, there’s not that ability to scale there.

The investor view

Redeploy capital away from Kodak. It’s true that if that loan had come through then that would have been transformative. It didn’t, it’s not going to now, yet the stock price is still buoyed by the excitement over the idea. Time to take the cash out and move on to something else, this isn’t going to come right.



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