Eastman Kodak (NYSE:KODK) has all the time been a troublesome funding, particularly with a 1-year share value efficiency regardless of the current surge, of just about destructive 43%. My first article on the corporate got here out in September of final yr, and whereas most firms appear to have outperformed since then, this one has not. Kodak continues to be down greater than 25% from that exact article and thesis.
Kodak is without doubt one of the “worse” firms within the sector, and on this article, I’ll shine a bit of sunshine on this underperformance and the place the corporate is, comparably and by way of its market state of affairs.
Let us take a look at 4Q22 and see the way it influences issues.
Revisiting Kodak – Time to reaffirm my “HOLD”?
Usually, I imagine that any firm can turn into a “BUY” at a sure value – until the firm solely consists of debt as soon as the whole lot is paid off. To say that Kodak would not have any worth goes too far.
The 4Q22 outcomes, together with the full-year outcomes, got here in comparatively positively. Income decreased solely by 1% regardless of ongoing strain, gross revenue is up, and GAAP web revenue was truly constructive – the corporate managed to eke out a $7M 4Q22 revenue, ending with round $217M of money on the books. On an annual foundation, income elevated by 11%, GM was largely flat and once more, constructive GAAP web revenue with a 2% improve year-over-year.
The corporate is efficiently launching new merchandise in keeping with its strategic plan, which I have been by in a few of my earlier articles. Step one right here was stabilizing the corporate’s floundering steadiness sheet, which I imagine that the corporate has truly managed now. Some operational efficiencies have additionally been realized, and Kodak is investing in its growth-oriented enterprise arms, together with superior Supplies &Chemical substances.
The corporate, as of 4Q22, debuted the KODAK PROSPER ULTRA 520 Inkjet Press and KODACHROME Inks. A part of the hazard when an organization has been crushed down for too lengthy is that buyers miss when issues are more likely to truly flip round – after we could make some revenue off the corporate. That is why I comply with an organization like Kodak, to ensure to focus on when it is time to perhaps begin pushing money to work.
With the stabilization of its steadiness sheet now completed, reorganization completed into Kodak One and specializing in what Kodak truly is ready to do effectively, the corporate might, within the not-so-distant future place itself as a horny funding.
The corporate’s 2022 was closely influenced by provide chain disruptions, shortages in each materials and labor and considerably elevated prices for these labors and supplies.
Nevertheless, it is vital to offer readers with the attitude that Kodak is definitely delivering right here. With the corporate’s new merchandise in digital and inkjet know-how, the corporate has been capable of make pointless conventional printing plates, which within the business shouldn’t be a small factor.
The corporate continues to be most assuredly in its transformative stage – 2023 is not going to be a large change to that. We’re beginning to see glimpses of what the corporate may be capable of do, together with delivering constructive adjusted operational EBITDA for 4Q22 in addition to for the complete yr.
Nevertheless, on a excessive degree, these glimpses are nonetheless simply that – glimpses and indicators, not precise turnaround tendencies. Debt, whereas stabilized, continues to be greater than firm money, and the corporate’s pattern by way of income/revenue continues to be barely constructive.
The corporate, by way of its return metrics, continues to be value-destructive and has been for years – although the worth destruction by way of the return on capital invested in relation to the price of that capital on a mean, shouldn’t be as unhealthy because it was in 2020, and has been bettering. Furthermore, the corporate is now extra than simply “debt”, with stockholder fairness going constructive, and has grown for just a few years now.
KODK stays a little bit of a “fish out of water”, given the tendencies in conventional printing, with most of its revenues (59%) from the standard printing sector. Nevertheless, similar to I’d put money into the final firm manufacturing horse carriages on the proper value (as a result of I do know somebody will all the time need carriages for the proper event), so do I stay not destructive about investing within the final bodily printing experience firm – once more, on the proper value.
I additionally anticipate the Superior Supplies and Chemical companies in addition to digital printing, to really develop and ultimately overtake the standard phase for the corporate. They at the moment make up round 33% collectively, and I anticipate this to develop to 40-45% within the subsequent few years. This also needs to enhance the COGS proportion, in addition to different working bills resulting from additional efficiencies.
What I’d be prepared to state presently is that Kodak has slowly turned its ship round. It is an oil tanker in a puddle, they usually’ve truly managed to show the boat. That is clear to me primarily based on:
- Slowly bettering revenues, money flows, and earnings.
- Step-by-step bettering fairness, debt, and money ranges.
- A market which, frankly, the corporate kind of “owns”, as a result of let’s face it who else however Kodak with the experience continues to be on this a part of the sport?
- Administration executing on acknowledged aims for the previous 2 years.
The current points on a worldwide scale have triggered the corporate’s income progress/reversal to stall considerably – progress charges are down. It is also clear and ought to be clear to you as effectively, that at this level the corporate doesn’t examine favorably to nearly something, and could be stated to be in decline or “Low” by way of elementary high quality when evaluating it to nearly something.
However there are positives.
The margins are increasing – slowly – and regardless of the problems we see. Going by the filings and utilizing strategies just like the Beneish M-Rating, we will additionally decide that the corporate is a most unlikely manipulator – the enhancements we see are actual. The corporate shouldn’t be manipulating its Gross margin index, asset high quality index, gross sales progress, or Depreciation, is not seeing inflating SG&A regardless of new product launches, and regardless of will increase in income, we aren’t seeing will increase in Accruals to a level that might fear me.
With this out of the way in which, and fundamentals additionally being coated by my final articles, the earnings for the yr have been a mark within the constructive column for the corporate, and we will take a look at valuation.
Kodak Valuation – the issue is Macro
Once I say that the issue is macro, what I imply is that if the corporate had delivered this efficiency in every other macro than the one we’re at the moment in, I would possible be much more open.
I’ve already acknowledged that the corporate did effectively and, because of this, has turn into extra engaging – the issue is that nearly the whole lot has turn into extra engaging prior to now 2 months or so. I am much less inclined to purchase high quality in a smaller, lesser enterprise if I can get AAA high quality even with a considerably decrease upside however greater security.
And that is largely the place we’re immediately.
Kodak’s friends, as they normally are described, make little sense on condition that Kodak largely does what different firms are abandoning. Thus, evaluating them to companies like Cintas (CTAS), Sodexo, Thomson Reuters or others makes little sense as I see it – but that is the place they’re normally put, in context.
We are able to additionally clearly state that multiples by way of EBIT, EBITDA, Income, and P/E and P/S-ratios all suggest both some kind of engaging valuation seen to firm historical past or to business or not a lot overvaluation.
Additional, within the constructive column, we even have some exercise each on the insider and on firm “BUY” fronts. Not solely have we seen some insider shopping for exercise each in 2022 and 2023 – in truth, considerably extra shopping for than promoting, the identical is true for asset managers and educated buyers. The implication shouldn’t be eager to be unnoticed of potential income. Tudor Funding Group, Caxton and Point72 are amongst people who have purchased firm shares. It ought to be famous although, that every one of those function with a considerably diversified portfolio, and none of them purchased particularly a lot. All the holders of shares achieve this at considerably low quantities – so the impression this has, even when constructive, ought to be restricted.
Few analysts comply with this firm, so we do not actually have an estimate from analysts for the place this may go, past that it “may” go up additional.
Additionally, notice that KODK continues to be at CCC+ by way of credit score – making it a “No-go” for many buyers right here.
We are able to see that from sure views involving constructive progress charges, we might get outcomes that suggest the present share value is honest, and even undervalued. However even when we have been to work underneath such assumptions, this utterly disregards the truth that this firm is a no-yielding, CCC+ rated enterprise. We additionally do not understand how lengthy it should take earlier than this turns into a workable enterprise, slightly than a sequence of concepts and legacy segments.
I stated in certainly one of my earlier items that issues are going the proper manner. Nicely, issues are most undoubtedly nonetheless going the proper manner – and the tempo at which they do appears to be bettering.
I imagine someday in 2023-2025, we might come thus far that I can provide a “Speculative Purchase” score on this inventory at a sure value. However for now, even with these positives in hand, and even with sure views of viewing the inventory implying an “Undervalued” valuation at round $5 PT, giving us an upside from $3.92 right here, I’d say that is nonetheless moving into too early, and being considerably too constructive.
I additionally would not go into this as any kind of short-term performs, as the entire 5-14 day RSI’s and momentum indicators are exhibiting that this firm is worse than over 85% of all the businesses within the business – and that clearly contains gamers that are not CCC+ rated and have a dividend.
With that in thoughts, right here is my up to date thesis for Kodak.
My thesis for Kodak is the next:
- Kodak is a powerful enterprise – if we checked out it in 1995. At this time, it is an organization with a mixture of remaining legacy property and phase concepts that it goals to broaden. It is proven some respectable progress on this enlargement – however I’d wait till we see even clearer alerts of this.
- I imagine the corporate could be purchased as soon as any kind of turnaround and readability is current right here – and as soon as we’re some kind of BB-rating.
- Till then, the corporate is a “HOLD” in case you imagine in it and personal it, in any other case, I would keep away from or “SELL” Kodak.
Keep in mind, I am all about:
1. Shopping for undervalued – even when that undervaluation is slight, and never mind-numbingly large – firms at a reduction, permitting them to normalize over time and harvesting capital beneficial properties and dividends within the meantime.
2. If the corporate goes effectively past normalization and goes into overvaluation, I harvest beneficial properties and rotate my place into different undervalued shares, repeating #1.
3. If the corporate would not go into overvaluation, however hovers inside a good worth, or goes again right down to undervaluation, I purchase extra as time permits.
4. I reinvest proceeds from dividends, financial savings from work, or different money inflows as laid out in #1.
Listed here are my standards and the way the corporate fulfills them (Italicized)
- This firm is total qualitative.
- This firm is essentially protected/conservative & well-run.
- This firm pays a well-covered dividend.
- This firm is at the moment low-cost.
- This firm has a practical upside primarily based on earnings progress or a number of enlargement/reversion.
Sure – to be clear – the corporate fulfills none of my present funding standards.