A Kodak moment: The dead dog bounce
Elise is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
My grandfather was an investor who carefully chose a few solid companies and held them. A part of his portfolio was the venerable Eastman Kodak (NYSE: EK). He would be shocked at what has happened to it. It’s a penny stock, trading at under $1/share since early December. The NYSE plans to delist it because its average closing price has been less than $1.00/share for over thirty consecutive trading days. Kodak may be heading back to the floor after a 2-day “dead cat bounce” that took it up to 84 cents.
Because Kodak is one of those grand American companies from the past, it’s an interesting story. George Eastman was a classic entrepreneur: largely self-educated he tinkered at home and perfected rolled film and a camera that was mass-produced. He also developed flexible transparent film which helped lay the groundwork for the motion picture industry. Understanding the value of research and development, the company established its well-respected research facilities in Rochester. He also was a major philanthropist, in the same league as Carnegie and Rockefeller, who quietly donated over $100 million to various causes, primarily educational institutions, including the funds which enabled the construction MIT’s campus on the Charles River. His suicide in 1932, at the age of 77, was explained in a shockingly clear note, “To my friends/My work is done/why wait?/GE”
His company outlived him for decades and transformed how our families could know previous generations, or far-flung relatives, as real people engaged in every day candid “Kodak” moments. Their little yellow boxes were present through every moment of my childhood and pictures from my parents’ childhoods are still remarkably warm and clear.
Kodak continued to roll along and even began some movement in the digital camera world by inventing a black and white digital camera in 1975. My first digital camera in the late 90’s was a Kodak, because I trusted the brand name. Without question, that camera was a hit in my little world. The future was obvious to everyone, except, apparently to Kodak. Instead of sticking with the magic, photography, that made their business “sparkle” in the first place, they have opted out of that world and are concentrating on printers.
Back in 1994, (then) tiny Eastman Chemical Company (NYSE: EMN) spun off from Kodak, a move that would make sense because film and chemicals were no longer inextricably linked. Today that company has a fairly-priced market cap of $6.7B and both its Price:Free Cash Flow ratio and its PE ratio are moderately positioned at approximately 11. They weathered the recent recession by asking everyone, including the CEO, to take a 5% pay cut to prevent layoffs. The strategy worked and the company has moved towards a team model as opposed to a paternalistic one.
Kodak, on the other hand, has taken a different route. It had long been an employment-for-life (or across generations) kind of company with generous benefits including pensions. At the turn of the millenium, Kodak was traiding in the mid 70’s but was already on its way down, never to recover. As it declined, layoffs began and people at all levels were provided separation packages (severance benefits have been reduced from two weeks per year of service to 1.5 weeks per year of service) and medical coverage for retirees. It stopped paying dividends in 2008 and now has a market cap of just $170M. Cash, the lifeblood of any business, has been evaporating. Last November they had $1.4B in cash and now have half of that. In September, it began to withdraw cash from its credit line, Moody's cut their credit rating and open talk of bankruptcy began.
In addition to not having much cash, they have some pretty hefty bills coming due. During their last earnings call (November 3, 2011), a brief mention was made of their pension woes. Kodak has substantial claims in the UK, where they have been operating since the late 1880’s. In the US, when bankruptcy is declared, pension obligations are an unsecured claim. In the UK, the Pensions Regulator has the legal authority to go after the money. Kodak’s UK pension obligations have been underfunded but the company in 2010 disclosed its plans to put $830M into it over the next decade.
So what’s the plan? Earlier this week, Kodak announced it would restructure its organization from three branches into two: Commercials and Consumer, with the latter being led by their Chief IP Officer. The restructuring of old hands itself doesn’t convince anyone that it will create value; their strategy relies on intellectual property. Kodak’s patents in digital imaging are estimated to be worth up to $3B. In 2011, Kodak tried to put these up for sale but, because of copyright lawsuits involving many of them, the sell fell flat. They have recently been filing patent infringement claims against Apple (NASDAQ: AAPL), Research in Motion; these cases have been slowed for various reasons, including the retirement of the judge, and will likely drag on to September 2012. In the last few days, as they announced the restructuring they announced new claims against Apple (naming its suite of iOS products) and the Taiwaneses company HTC (naming its Android-based phones and tablets). The patents (6,292,218; 7,210,161; 7,742,084; 7,453,605; 7,936,391) involve transmitting images from the camera to other devices and also capturing still images while previewing motion images. Now, here’s the thing: I just do not understand a business model that relies entirely on litigation and, frankly, it doesn’t provide me with any “sparkle” to look into it further. Your mileage may vary.
I can’t help but wonder what the inventor/philanthropist George Eastmann would think of his legacy. The company is now led by a CEO who joined Kodak eight years ago; they have seen a profit in only one of those years. Prior to arriving at Kodak, he served as an independent consultant for large investment firms, providing counsel on the effect of technology shifts on financial markets. I have to say that I find that ironic. He also was at HP where he worked with their Inkjet Printing business and thus his interest in printers is not surprising, although Kodak’s inability to compete with HP might be. The CEO is one of the “high-flying” CEO’s that we hear about lately from DC. In 2010, he racked up a $309,407 bill using Kodak's jet for personal travel, according to regulatory filings. Ironically, as he flies this once-great company into the ground, he is a member of the President’s Council on Jobs and Competitiveness.
I might look at Kodak’s earnings call on January 26, out of curiosity, but I am more likely to pay attention to the earnings call for EMN on January 27 at 8:00 AM. In the meantime, I’m reminiscing and I have this song running through my head: "They give us those nice bright colors / They give us the greens of summers / Makes you think all the world's / a sunny day ...I know they'd never match / my sweet imagination / Everything looks worse / in black and white.“
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