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Investing, Reflections

Kodak Stock is Up Over 1,400% in Two Days. Does It Make Sense?

by Chris Susanto 

30 July 2020

Eastman Kodak Company (NYSE: KODK) opened at $2.15 (Monday) on July 27, 2020, and closed at $33.20 (Wednesday) by 29 July 2020. That is a 1,444.19% increase over a two day period.

In this article, I am going to give you some background on the Kodak company, the reason for the rally as well as my thoughts on whether it made sense or not. I will conclude with some lessons that I think we can apply to this kind of situation.

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Background on The Eastman Kodak Company

Kodak is a United States based company that is well known for its photography business.

They operate several business segments which include Print Systems, Enterprise Inkjet Systems, Kodak Software, Brand, Film and Imaging, Advanced Materials and 3D Printing Technology, and Eastman Business Park.

Kodak print systems segment consists of the majority of their revenue and it offers services such as commercial printing and publishing for books.

Most of its revenue comes from overseas markets.

The Reason for Kodak’s Recent Rally

The reason for Kodak’s recent rally has got nothing to do with it’s printing or it’s film business segment.

Kodak basically won a loan of $765 million by the US government (under the Defense Production Act) to make ingredients for generic coronavirus medicines.

Read also: “Patience Produce Uncommon Profits” – Why Patience in Investing is Vital.

My Thoughts on Whether Kodak Rally Made Sense

The US government’s intention is to engage Kodak for the production of these critical ingredients that are short in supply. This is also a part of the American government’s effort to reduce reliance on overseas suppliers and instead, make these ingredients in the US itself.

The volume of stocks traded on the company went up over twenty times its normal range.

Does the rally make sense, fundamental wise?

Think about it. Kodak market capitalization is about $100 million before the two-day surge. It is now about $1.5 billion. That is an increase of about $1.4 billion plus-minus.

Remember that the $765 million given under the Defence Production Act is a loan. Kodak has to pay it back.

Even if the $765 million is a pure cash gift given by the US government, the $1.4 billion increase in the market capitalization is twice that value.

So to me, logically speaking, it does not make sense.

Kodak loan terms must be repaid over 25 years period and its terms are similar to a commercial loan.

Did you know that Kodak has filed for bankruptcy before in 2012? Despite inventing the digital camera back in 1975, the company has failed to innovate and grow in the face of competition.

Peter Navarro, the White House trade adviser’s office is currently also considering around 30 firms for funding to fight the virus and protect the public health. Kodak will not be the only one.

The recent rally of over 1,400% made zero fundamental sense. In terms of margin and growth-wise, I also do not think that they are going to make above average return because it is a generic ingredient after all.

If you like psychology, read: Thinking, Fast and Slow Book Summary (What I Learnt As An Investor).

In Conclusion

The market is acting as if the value of the Kodak company has increased by about $1.4 billion. As of the information now, I think that it is overhyped.

And this reminds me of the recent run-up of companies like Hertz.

Kodak’s debt position is still manageable.

But history tells us that when a company stock price runs up too much away from its fundamentals, that stock price will likely not be sustainable.

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