Almost forgotten, Kodak (
EK) may be one of the top contrarian value plays of the year.
Aroundsince 1880, and once the dominant film company, Kodak went from a74-year tenure (1930-2004) in the Dow Jones Industrials Index as one ofthe largest companies in the world to finding itself ousted from theS&P 500 Index at the end of 2010 as it struggles as apotentially-obsolete penny stock.
As it faces an uphillbattle to revive itself and transform its business from a decliningtraditional film business to the digital world that has overtaken it bystorm, Kodak will undoubtedly continue to find itself teetering over theedge of bankruptcy and failure. But with an almost complete disbeliefby investors of any Kodak comeback, the highly-forgotten status of thestock, and overlooked company and brand value, Kodak may prove to be oftremendous value, regardless of its future success (or failure).
8 Reasons to Buy Kodak:
1)Extremely Low Expectations. Almosteveryone thinks Kodak is a thing of the past, a company that has nochance of coming back and is just hanging on for dear life as it slowlybecomes more obsolete in competition with newer, more innovativecompanies. And while these claims may be true, the stock price hasdropped so much that expectations of failure may be already priced in.At around $3 a share, there is little if any expectation for positivenews. In other words, any good news for the company or improvedfinancials could send the stock soaring as investors start payingattention to the company again.
2)Company Components May Be Worth More Than the Stock. Onceone of the largest companies in the U.S., Kodak has dropped to a marketcap of $960 million, smaller than most companies you could probablythink of. Yet while its market cap is relatively small, Kodak possessesassets that may make the company worth more than what it is currentlytrading for. Other than its tangible business assets – property,machinery, etc – Kodak has rights to 11,000 patents which can be worth aconsiderable amount of money. Kodak has licensed its intellectualproperty to Samsung (
SSNLF.PK) and LG for approximately $450 million in the past, and is currently
awaiting a court ruling against Apple (
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. Thoughit 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 isdefinitely 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 failingcompany, the Kodak name still holds some considerable value. And withthe stock at such depressed levels, a bet on the brand name may be besttaken now.
5)Buyout Candidate. Kodakmay be doomed to stage a comeback or even fail, but the combination of adesirable patent portfolio, recognized brand name, respectable cashlevels, and dirt-cheap company make Kodak a potential buyout candidateas well. In other words, even if the company is failing, a largercompany 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 buyoutearlier this year. Though maybe not a real offer, a $1.3 billion offerwould provide more than a 30% premium over the current $960 millionvaluation. This is not a far-fetched possibility.
6)Insider Buying. Insiderssuch as CEO Antonio Perez and a few directors have recently purchasedKodak shares in May, signaling increasing faith in the company bymanagement. Though the purchases are relatively negligible at about60,000 shares (~$200,000) bought by Perez, the purchase is nonetheless asign 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 large25.6% short interest in Kodak stock adds tremendous value as ashort-squeeze play. In other words, so many people are betting againstthe company right now, that if any decent news even comes out, the stockcould soar.
8)Technicals.After dropping from nearly $30 in 2007 to under $3 as recently as thispast 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.
Kodakmust first face the court’s ruling regarding its case against Apple andResearch 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 thinkthe value is there.