Today is a day of sorrow. Eastman Kodak (EK), an icon of American invention, filed for bankruptcy protection. And not only that, it has been an incredible waste of shareholders’ cash and resource over the last decade.
One of the first posts on this blog, and one that I am proud of, was a review of the dangers of Eastman Kodak as an investment. You can read it in its entirety here. Now, some additional comments.
To start, I am not going to say that I predicted Kodak’s demise because, as you will read, I did not. Instead it was an example of the potential dangers of investing in companies under revenue stress based on its assets, and a call to avoid investing in turnarounds before they showed signs of revenue stabilization.
What happened to those asset that supposedly provided a margin of safety? What those assets did provide was time, time to realize that things were not going well and get out. It was one reason I sold Premier Exhibitions: despite the very real possibility that it is going to sell the Titanic assets for a premium, cash and revenues started to decline.
Finally, there are several interesting situations today that fit the mold, priced well below book value but with revenues under stress, like Research in Motion (RIMM) and Sears Holdings (NASDAQ:SHLD). Both have much better chances than Kodak of surviving. Research in Motion revenues are even growing, though at a much slower rate. But still be careful -- turnarounds are not asset plays. There is no hurry. Wait for revenues to stabilize first.