KODK - Eastman Kodak: Down But Not Out

2024-01-04 10:39:51 ET

Summary

• Eastman Kodak's stock has experienced a significant decline over the past 39+ months, down over $5 per share or 58%+.
• The stock currently has a high earnings yield of 18.45%, making it an attractive investment option.
• The company's assets are undervalued, with a book value per share well above the current stock price, and it has shown encouraging liquidity and margin trends.

Intro

We wrote about Eastman Kodak Company ( KODK ) in September 2020 when the stock's implied volatility spike had us looking at option selling strategies. Above-average implied volatility levels essentially mean more fear in the market where a large 'expected move' leads to above-average option prices which in turn suit the option seller. Although we decided to trade KODK from a delta-neutral standpoint at the time, long investors (if they had held on to their positions) would have been crippled over the past 39+ months as shares are down over $5 per share or 58%+ in this period.

Fast-forward approximately 13 trimester quarters, and trading conditions are much different now compared to what they were back in the throes of the pandemic. We state this because shares have been pretty much rangebound for the best part of two years now, although lower highs continue to be the underlying technical pattern. This means that the present implied volatility reading of 58%+ is a far cry from the 170% IV number back in the fall of 2020.

Therefore, considering the significant fall in KODK's share price over the past 3+ years, let's go through the investment case for Eastman Kodak at this point.

High Earnings Yield

The first encouraging sign is that the stock is healthily profitable (Trailing GAAP earnings of $77 million) which means the stock's trailing GAAP multiple comes in at a very keen 5.42. To give an insight into how attractive this multiple is, if management decided to pay out all of its earnings to its shareholders in the form of a dividend, the yield would (i.e., earnings yield) come in at an excellent 18.45%. We state 'excellent' because guaranteed investments such as the 10-year Treasury bond currently yield approximately 4%. Many corporate bonds from established companies yield more. Therefore, given the present trading environment, we (as investors) need to be earning at least 6% before we take our analysis further. Eastman Kodak's cheap earnings pass the initial test here.

Trailing earnings are one thing but deciphering the real value of this business stems from the earnings the company will report in the future.

Cheap Assets, Encouraging Liquidity & Margin Trends

A company's assets are essentially what produces sales, earnings, and cash flow for a company. They are the roots that birth the tree. Therefore, considering that KODK's trailing book multiple comes in at 0.32, this means that the company's book value per share comes in well north of $11 (current shares price is $3.63). Many value investors only buy stocks that are trading well below their book values as this offers a margin of safety when one considers how Eastman Kodak's shareholder equity ($959 million) dwarfs KODK's present market cap ($291 million).

Although sales fell by roughly 7% or $20 million in the company's recent third quarter, gross profit increased by approximately $9 million due to better operational efficiency and value realization. Higher margins on lower sales mean the company's assets have been performing better, all things remaining equal. In this respect, management intends to keep doubling down on investments within its Advanced Materials & Chemicals segment and scale up production of other products in the substrate coating segment.

Furthermore, plenty of scope exists in the test reagent space, where demand for CGMP continues to grow. Antennas in the transportation space are seen as another growth area where production is now ready to ramp up to meet demand. Therefore, as long as the balance sheet can be protected going forward, share-price gains should come as a result of these investments given the low valuation currently on offer.

In terms of liquidity, the current ratio at the end of Q3 (2.63) improved from the reported 2.32 at the end of fiscal 2022. Stronger liquidity gives KODK more flexibility if present trading conditions were to persist somewhat. We believe it was a sound move to bolster the balance sheet (by taking on more long-term debt) as sustained trends in the likes of inflation, labor problems as well as supply-chain bottlenecks could continue to subdue demand in the markets KODK services.

Furthermore, KODK's debt-to-equity ratio (post refinancing) comes in at a reasonable 0.47 which means if EBIT can continue to surpass interest expense by some distance, the company should be able to continue to generate cash flow. This trend would protect (and give the above-mentioned investments time to bear fruit) the balance sheet over time.

Conclusion

Therefore, to sum up, Eastman Kodak is cheap, profitable, and is generating cash flow. Although sales contracted in Q3 this year, a higher gross margin print still resulted in positive GAAP earnings for the quarter. Given the stagnation we see in the technicals, we await a better entry here before putting capital to work on the long side. We look forward to continued coverage.

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