Kodak is Back? How Perception Plays a Key Role in Valuation

From cameras to pharmaceuticals the roller coaster of Kodak’s business valuation.

Rochester seemed to be buzzing last week, as huge news surrounding the future of the Eastman Kodak Company broke on July 28th.  It was reported that Kodak is to be the recipient of a $765 million loan from the US government to produce pharmaceutical ingredients, which could account for up to 25% of the generic pharmaceutical supply chain in the country.  Undoubtedly, a bright turn of events for the fledgling camera/imaging business that was once a powerhouse of growth and innovation.

With the news, the promise of job creation had everyone excited about what this means for the future of the company and the future of Rochester.  With the news exploding on the national scene, it was expected that there would be some movements in the stock price, and likely in the positive direction.  “Movements” turned out to be a massive understatement as volatility ensued for the entire week as investors tried to figure out what this loan meant for the future of the company, and how that future aligned with its valuation.

Kodak’s stock had been trading at a mere $2.62 per share on Monday before rising to $8.80 per share after the close of the trading day on the 28th.  The stock would get as high as $60 per share in intraday trading on Wednesday before closing in the mid-30’s and then ending the week at a little over $20 per share.  So, how had investors perceived Kodak’s valuation differently in light of this news?

  1. Earnings/Growth – With this announcement, the company that has long been stagnant now appears to have a new growth engine.  The margin structure on pharmaceuticals should drive future earnings to levels that are much higher than Kodak currently reports.
  2. Industry-Specific Risk – Kodak’s primary business line in the future appears to be generic pharmaceuticals.  An industry that is growing much more rapidly and has a larger potential market than its legacy business.  Multiples in the pharma industry tend to be significantly higher than Kodak’s other business lines.
  3. Leverage Risk – Kodak had long been at the high end of the risk spectrum due to its massive debt levels and inability to sustain profit margins and significant growth. The promise of what is assumed to be cheap capital from the US Government and a new business line to drive profitability should help Kodak get out from under its current debt load.

Although investors perceive Kodak much differently in light of the news in regards to its future profitability, growth, and risk profile, the movement in the stock price and market capitalization of the company in the past week have been impacted by speculators and day traders, likely to a greater extent than by fundamentals.  As Robinhood has grown tremendously since the onset of the pandemic, there are more uneducated traders than ever before.

There are still many unknowns at this point related to the loan, how Kodak will use it, and what the future holds for the company.  There is likely more risk than is being priced in at this point, but it is exciting for Kodak and for Rochester to have a glimmer of hope for the company that was once the crown jewel of the Flour/Flower City.  Kodak has caught our attention and will likely hold it for a while as the loan and entrance into the pharmaceutical space continues to play out in the coming months and years.  I am cautiously optimistic that good things are on the horizon.

For more information on how perception may impact your company’s valuation please dont hesitate to reach out to me at mtota@teamdkb.com.