Almost forgotten, Kodak (EK) may be one of the top contrarian value plays of the year.
Around since 1880, and once the dominant film company, Kodak went from a 74-year tenure (1930-2004) in the Dow Jones Industrials Index as one of the largest companies in the world to finding itself ousted from the S&P 500 Index at the end of 2010 as it struggles as a potentially-obsolete penny stock.
As it faces an uphill battle to revive itself and transform its business from a declining traditional film business to the digital world that has overtaken it by storm, Kodak will undoubtedly continue to find itself teetering over the edge of bankruptcy and failure. But with an almost complete disbelief by investors of any Kodak comeback, the highly-forgotten status of the stock, and overlooked company and brand value, Kodak may prove to be of tremendous value, regardless of its future success (or failure).
8 Reasons to Buy Kodak:
1) Extremely Low Expectations. Almost everyone thinks Kodak is a thing of the past, a company that has no chance of coming back and is just hanging on for dear life as it slowly becomes more obsolete in competition with newer, more innovative companies. And while these claims may be true, the stock price has dropped so much that expectations of failure may be already priced in. At around $3 a share, there is little if any expectation for positive news. In other words, any good news for the company or improved financials could send the stock soaring as investors start paying attention to the company again.
2) Company Components May Be Worth More Than the Stock. Once one of the largest companies in the U.S., Kodak has dropped to a market cap of $960 million, smaller than most companies you could probably think of. Yet while its market cap is relatively small, Kodak possesses assets that may make the company worth more than what it is currently trading for. Other than its tangible business assets – property, machinery, etc – Kodak has rights to 11,000 patents which can be worth a considerable amount of money. Kodak has licensed its intellectual property to Samsung (OTC:SSNLF) and LG for approximately $450 million in the past, and is currently awaiting a court ruling against Apple (NASDAQ:AAPL) and Research in Motion (RIMM) that could potentially mean an additional $1 billion in revenues. Kodak may be worth more than the sum of its parts.
3) Lots of Cash. Though it currently has $1.45 billion in debt, Kodak has $1.3 billion in cash – approximately $4.83/share (the stock is at $3.57 today). Debt is definitely an issue, but the large amount of cash also adds value.
4) Brand Name Recognition. Kodak has been a household name for over 100 years. Even as a failing company, the Kodak name still holds some considerable value. And with the stock at such depressed levels, a bet on the brand name may be best taken now.
5) Buyout Candidate. Kodak may be doomed to stage a comeback or even fail, but the combination of a desirable patent portfolio, recognized brand name, respectable cash levels, and dirt-cheap company make Kodak a potential buyout candidate as well. In other words, even if the company is failing, a larger company may come in and buy Kodak out for a premium over current prices. Though not necessarily confirmed, Kodak was supposedly offered a $1.3 billion buyout earlier this year. Though maybe not a real offer, a $1.3 billion offer would provide more than a 30% premium over the current $960 million valuation. This is not a far-fetched possibility.
6) Insider Buying. Insiders such as CEO Antonio Perez and a few directors have recently purchased Kodak shares in May, signaling increasing faith in the company by management. Though the purchases are relatively negligible at about 60,000 shares (~$200,000) bought by Perez, the purchase is nonetheless a sign of faith in the company and potentially good upcoming news.
7) Huge Short Interest. Also a sign of extremely low expectations for the company, the large 25.6% short interest in Kodak stock adds tremendous value as a short-squeeze play. In other words, so many people are betting against the company right now, that if any decent news even comes out, the stock could soar.
8) Technicals. After dropping from nearly $30 in 2007 to under $3 as recently as this past May, Kodak may have bottomed out at $2.75. If it can break above $4, the comeback may gather steam as the stock continues to rise.
Kodak must first face the court’s ruling regarding its case against Apple and Research In Motion. If it wins the case, the comeback may be in place. Otherwise, the stock may fall back into the ditch again. I still think the value is there.
Disclosure: I am long EK.
Additional disclosure: Long through call options.