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Kodak: Melting Ice Cube With No Growth And Hidden Liabilities Offers Substantial Downside

ShortOpinion profile picture


  • Kodak’s core business segments continue to shrink due to unattractive technologies in secular decline.
  • Kodak is mischaracterized as a “growth company” or “technology company” despite its obsolete product line, continued decreasing sales and earnings, and unrealistic EBITDA guidance.
  • The optimistic view on “hidden assets” may actually be described as potential hidden liabilities.
  • Management is overly promotional, presents financial reports in a deceptive manner and exhibits other red flags.
  • Valuation is rich, and fair value is likely 25% to 50% lower than current levels.

Kodak (NYSE:NYSE:KODK) - Common Stock Short

Date: 12/28/15

Price: $13.00

Timing: 6-12 months

Catalyst: Increased investor scrutiny; earnings guidance reduction

In this report, we will illustrate that Kodak's operating segments are unattractive, the earnings guidance and anticipated growth are unrealistic, hidden assets are of little value and may actually be hidden liabilities, management is excessively promotional and the valuation is unattractive.

Kodak's core business segments continue to shrink due to unattractive technologies in secular decline

Company Background, In-Court Bankruptcy Restructuring and Post-Reorganization Overview

Eastman Kodak was once a blue-chip stock that memorialized the phrase "Kodak moment" as a leader in photography and film technology. Founded by George Eastman in 1892 in Rochester, New York, Kodak dominated the film industry for most of the 20th Century, until the digital age revolutionized technology and left traditional film-based photography obsolete. While Kodak was actually responsible for the development of the first digital camera in 1975, the company's cultural of bureaucracy and complacency caused Kodak to not actively pursue the research or development of the product, and starting in the 1990s, the company began to suffer significant strategic and financial challenges as the digital camera industry took off.

As a result of the continued threats posed by the evolving technological landscape, and despite several unsuccessful attempts to cut costs and turn around the business, Kodak filed for bankruptcy in the United States Bankruptcy Court in New York in January 2012.

The company began its reorganization process by engaging investment bankers to execute what it thought, or perhaps hoped, would be a quick and relatively painless restructuring process whereby it would sell its valuable digital imaging IP assets, right-size its capital structure, and emerge as a leaner, more financially sound business. The "EmergeCo" business was expected by management to be focused on its core printing and scanning operations going forward. However, the auction for Kodak's

This article was written by

ShortOpinion profile picture
I currently work at a US-based hedge fund.

Analyst’s Disclosure: I am/we are short KODK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (19)

Value On The Street profile picture
Stock is on fire. Anyone still holding onto a short here?
Cash-Centered Creep profile picture
Excellent, comprehensive overview. It's sad to see what's become of Kodak. A once-great company whose time has long since passed.

Leveraged Loner profile picture
Good article shortopinion- thanks for the post. Someone gave me this as their best idea, scary thought!

I came to many of the same conclusions, but I think the situation seems even worse than you made it out. Adjusting the TEV for cash subject to repatriation taxes and cash that is (seemingly?) trapped in China, the valuation and leverage looks even more ridiculous. Even if they hit their 17 EBITDA targets, the company still seems over 5x net levered (using only US cash).

Do you have a px target?
zerobid profile picture
Not really. Cash is down 300m since 2013. Clarke over promises, comes off as very promotional, and less than honest. And there initial trajectory post ch 11, is well off the mark.
This article is incredibly detailed and can only have been written by someone with intimate knowledge from inside the company, perhaps an ex employee and certainly someone who is incredibly bitter about Kodak. Whilst I understand everything that is laid out here you have to question all the bad news. Are there no good things about this company, are the investors stupid enough not to also see what this author is seeing?
For a company only out of C11 for about 2 years its a steep hill to climb and not everyone wants them to make it to the top!
My experience is that for every bad article (and lets face it we can all write those) there is usually a good one that balances out the arguments.
Value On The Street profile picture
Company just preannounced Q4. Revenue was up quarter on quarter it appears and the company generated sizable positive free cash flow - the first time since bankruptcy. The short has worked due to the news vacuum and the broader market sell-off...not clear it will continue to work. The company has levers it can pull to delever and reduce interest expense. We will see.
Xenogears23 profile picture
just covered my short but I short again on a pop
Why do GSO, BlueMountain, and friends continue to buy equity?
Richard X Roe profile picture
NataliePortLAN: Because somebody has to buy what the smart money is selling.
They are the smart money....
Drunken Brewer profile picture
BBrass, That's Burox to you. Same story only not as ugly.
please do an in depth article on xerox. this is very good analysis
Xenogears23 profile picture
Awesome article. I put on a token short before even finishing the article. I had no idea KODK was even back in the market. Sounds like a lot of BS to me and the earnings and profits look really bad.
As a long time resident in the Rochester NY area, I have seen first hand the decline and fall of a company based on the now outdated slogan, "You press the button. We do the rest." That simple business plan first espoused by founder George Eastman led Kodak management in later years to disavow digital photography altogether. Why? Because digital eliminated Kodak's middleman position of processing and printing, and Kodak still wanted to "do the rest."

This article gives exemplary details on why the company continues to fail. But there's more to it than just the individual elements in what remains of the firm. It's the culture itself. Back in the 1970s, Kodak, trying to regain control of its "we do the rest" middleman profits, decided to make and market its own instant cameras, similar to those made by Polaroid. Kodak at that time made all of Polaroid's film material, but that wasn't enough, apparently. They wanted a piece of the action that would include selling Kodak's own film and paper under its own label.

A Kodak employee told me what happened next. Kodak went to Polaroid to ask for a license to allow Kodak to make its own instant camera and film. Polaroid refused a license, but then Kodak said it would produce its own product anyway. What resulted was a patent infringement suit, in which Kodak was found to have violated some 12 key Polaroid patents, ending Kodak's instant camera business and giving Polaroid a few more years before digital eliminated the need for both.

One could also cite the difficulties Kodak brought on to itself in its labor relations, especially its efforts in the 1960s against minority employment. And its Band Aid strategies to circumvent environmental degradation near its factories, forcing purchase of contaminated housing and slap-on-the-wrist fines for illegally transporting hazardous materials. I could go on, but the point, in short, is that the writer of this article has described in great detail why Kodak shares may be the best short sale of an entire era.
What were great leading technology assets we may never again see such
a collection and likes of, blown by corporate management that IMO behave
like a clown bus of monkeys with sticks pointing at things.

Kodak has had management brain cancer for decades and now the brain's remaining stored memory is being erased and destroyed. The people they have managing Kodak from top down have no concept of the technology they have. They that have promoted people within maintaining the cancer cells of the bankrupt Kodak, fired the wrong people and now the ice cube melts in the desert.

Just like Kodak could not sell its patents, it shows what management they have cannot sell the technology properly. Good lick bond holders, the technology window is passing Kodak and what do you have to show for what you hold ?

Blackrock what will you end up with here?
Richard X Roe profile picture
ShortOpinion: That Micro 3D printing business has nothing to do with 3D. Kodak, while in Chapter 11, made a deal with a long-running scam, UniPixel, to manufacture 2D metal mesh for them, using UniPixel's "technology" (which is actually a very old textbook process, dismissed as commercially useless years ago due to its poor yields and high costs). Kodak uses its Flexcel plates in a standard flexo press to print catalytic ink in a simple pattern on a flexible substrate and then it puts it into a toxic solution to cover it with copper using an electroless plating process. For reasons unknown, Kodak started calling this obvious 2D process "Micro 3D printing" once Mr. Clarke arrived at the scene. He has also been misleading investors about the cost-competitiveness of the process.
zerobid profile picture
Your were obviously spot on Unipixel. Kodak says it remains committed to the touch screen market, and Clarke projected a viable business in 2017. What's your opinion on Kodaks resolve. Are they blowing smoke, waving a carrot, or do they have the technical expertise to be a real competitor in this space?
Richard X Roe profile picture
zerobid: Yes, Clarke is not telling the truth about the dismal status of both the copper and the silver-halide touch sensor "businesses." And, no, Kodak is simply too late to the game - touch sensors are now free - yes, free - meaning, they are integrated into the display itself by the display manufacturers using a simple extra step or two - and Kodak is no display manufacturer - it is game over.
zerobid profile picture
Rich, just how bearish are you on Kodak? You seem to hold a grudge because of the nonsense with UNXL. The people I talk to think Sonora is world class! You seem to have thrown Kodak in the same pot as Unipixel ! No?
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