Today we're looking at Eastman Kodak (NYSE:KODK ). I often review Eastman Chemical (EMN) - so the first question you might have is just what the relationship is between these two companies. Well, it was over 25 years ago that EMN was spun off from Eastman Kodak - a saving grace given how things have gone for Kodak since. Eastman Chemical was a Kodak Subsidiary originally founded to supply Kodak's chemicals but was spun off.

Today Kodak has a market cap of $416M. Eastman Chemical has $11B.

Things have changed - and Kodak's history is one of change.

Eastman Kodak is a major player in the formerly relevant field of analog photography. Its legacy is its products in this segment. The company does, according to its description, packaging, printing, graphics, and professional related services for customers around the world, but it's well known for its photographic film.

The company has a 110+ year history, and during most of the entire 20th century, the company held a dominant position in photographic film. I'm old enough that most of my youth and childhood was captured on analog cameras, so "Kodak moments" is something I'm well aware of.

However - all good things come to an end - especially for companies that fail to change with the times or change up their business model. While we cannot "blame" Kodak for all of its failures, the company certainly could have adapted much better.

The decline came at the end of the 1990s because - as we now know - digital was and is the future. Kodak tried to stay relevant, creating digital cameras, developing tech, and digital printing in an attempt to generate revenues. It tried to leverage its patents, its market position, and everything under its belt. However, as we see now, this eventually failed.

It took over 12 years - but it failed.

Legacy Kodak filed C.11 in 2012 - and stopped making cameras shortly thereafter - as well as most of its other products. It instead elected to focus on the corporate digital imaging market. In late 2012, the company even sold its namesake photographic film product line, scanners, and kiosks in a measure to return from its chapter 11, begging the question: "Just what is left?".

The company then carved up what was left further, emerging from bankruptcy in 2013 and selling off over half a billion worth of patents to businesses like Apple (AAPL), Google (GOOG), Facebook (META), Microsoft (MSFT), and others. In short, the companies that were bound to "take over".

Again, this begs the question - what is left?

What's left are four business arms, or segments - Traditional Printing, Digital Printing, Advanced Materials, and Chemicals/Brand.

This includes operations in Prepress solutions (plates/printing plates), imaging solutions, and services for digital and traditional product services to various end users and industries including commercial print, direct mail, book publishing, and magazines/packaging. Far from the easiest segment to be in, given the raw material/input challenges, supply chain issues, and ongoing digital substitutions.

Digital printing focuses on Electrophotographic solutions, Toner technologies, production press systems, consumables (ink), components, software, and services. The company also offers software.

Kodak also does advanced materials/chemicals, including still photographic film (industrial) in order to print circuit boards, specialty chemicals for the pharma industry, solvent recovery, and motion picture film. It's the company offering the Prosper business lines, including but not limited to PROSPER Press systems and PROSPER Components. Applications of PROSPER include most legacy printing end users, and obviously, such systems also result in recurring sales of ink.

Kodak is a host of industries and technologies, much of it still legacy. Its primary input is lithographic aluminum - and it buys the coils from several sources, though there's currently massive volatility in the pricing of this feedstock.

Kodak's fundamentals are unfortunately not impressive. Since emerging from bankruptcy, the company has consistently failed to generate any amount of positive cash flow, with the exception of 2019. The company has a CCC+ credit rating - the first ever company below a B/BB that I have reviewed.

CCC+ means that a company or government is currently vulnerable to adverse economic conditions, and will only meet its financial commitments if conditions remain favorable. This is a highly speculative rating, which obviously goes in line with what Kodak is currently doing.

Recent results in 2Q22 are a mixed sort of bag. Revenues are up 10% YoY, and gross profit was up 11% YoY as the company improved its strategy and mix. At the same time, Kodak is experiencing massive supply chain disruptions, labor shortages, and increased costs.

Still, the company was able to deliver a new product launch - the PROSPER 7000 Turbo Press with less than 12 months from concept to commercialization, also launching the KODAK ASCEND digital press (PPO market and small packaging). The company is busily launching products and technologies left and right to try and capture market share with competitive solutions based on sustainable water-based inks.

Kodak is also working on its Chemical segment.

The high-level targets of Kodak as things stand right now, are to reduce its debt and enhance its earnings, eventually resulting in positive cash flow. The company's current business model is a difficult mix - focus should be on its ongoing transformation strategy.

The target core competencies are print and advanced materials/chemicals.

There are some things that the company has managed for the past 2 years.

The company's valuation is extremely muddled thanks to the meme-stock mania. KODK has, I argued, still not normalized from this. There's also the not insignificant matter that the previous administration under the defense production act was about to grant Kodak a massive loan in order for the company to produce precursor chemicals to a variety of end products. This loan never went through.

The company's original business got consumed by the technology change. Really, aside from printing, the company believes the following things are left.

Viewing these from a very logical lens, all of these business opportunities represent just that - opportunities for the company to grow. All of these are legitimate. It also makes sense, because all of these things are things that Kodak actually knows. But none of them are really markets where Kodak has the ability or fundamentals to capture massive market share.

The company may have the cash and resources to bring some of these to market and start capturing market share - but that does not necessarily make the company a good investment.

When we boil down Kodak to what it "is", it's a number of decent technologies and products in printing (like the PROSPECT), coupled with a few interesting ideas and operations based on Legacy-Kodak lab work. When viewing the quarterly reports, I really have no issues with any of these things.

My issues are instead as follows:

Kodak's multiples unfortunately do not make sense.

The company's EPS is around 240x at this time. it's gone from a negative P/E of 1.26x in 2021, to a 240x here. From a 6.28x P/B multiple to around 0.46x today. What this implies is a company that really cannot be judged or valued by traditional metrics, and especially not multiples.

It can be objectively said that the company is "cheaper" now than it was in 2021 because the share price is obviously cheaper. However, we have no forecasts, no real workable multiples, and no real forecast accuracy on a historical basis.

The recent set of results shows us that improvements are ongoing - and the company actually generated positive operational EBITDA for 2Q22.

A few analysts and contributors have made attempts at providing a workable valuation for Kodak. However, many of them encounter the same issue - there are no forecasts or financial analysts really working the company, despite that shares aren't that uncommon in ownership.

I work with my own assumptions. Based on management guidance and what's been happening for the past few quarters, I would argue that we can use a positive forecast, assuming a growth rate of 4-7%. Why such positive metrics?

Because even assuming this growth rate, and a WACC range that's wide between the current-considered WACC of 27% (Source: GuruFocus) and higher, we still get an implied share price per share that's well below $4.5/share.

This tells us the following things. DCF models will usually result in disappointing implied valuations. The issue is, in part, the massive volatility to the share price. Beta plays a role here. In addition, the company's equity weighting remains very high (though lower now), and WACC depends mostly on the overall cost of capital. A high beta results in a high cost of capital. While the beta is down from highs of 6x back in 2020-2021, we're still at 4.4X.

In the end, and closing on this exercise, I want to state my view like this.

We can see that from certain perspectives involving positive growth rates, we may get results that imply the current share price is fair. But even if we were to work under such assumptions, this completely disregards the fact that this company is a no-yielding, CCC+ rated business. We also don't know how long it will take before this becomes a workable business, rather than a series of ideas and legacy segments.

Things are going the right way, but I don't see a good way to state a convincing thesis that calls for a "BUY". Deutsche Lufthansa (OTCQX:DLAKY) was easier to evaluate than Kodak.

If you own Kodak and view the future as positive, a case can be made for why the company may appreciate it from here. Take a look at the recent results, and you can see the company moving in the right direction.

However, otherwise, I would view this as something to avoid. There is too much risk and too many uncertainties to really state this as a workable sort of investment.

In the end, there's still too much uncertainty and optimism baked into the business. it's either a "HOLD" or a "SELL" here - and I elect to go for a "HOLD" if you own it and believe it in - otherwise, I would say "avoid" this company.

My thesis for Kodak is the following:

1. Buying undervalued - even if that undervaluation is slight, and not mind-numbingly massive - companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.

2. If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.

3. If the company doesn't go into overvaluation, but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.

4. I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.

Here are my criteria and how the company fulfills them (bolded)

This company is overall qualitative. This company is fundamentally safe/conservative & well-run. This company pays a well-covered dividend. This company is currently cheap. This company has a realistic upside based on earnings growth or multiple expansion/reversion.

Yes - to be clear - the company fulfills none of my current investment criteria.

What's your view on Kodak?

The company discussed in this article is only one potential investment in the sector. Members of iREIT on Alpha get access to investment ideas with upsides that I view as significantly higher/better than this one. Consider subscribing and learning more here.

This article was written by

36 year old DGI investor/senior analyst in private portfolio management for a select number of clients in Sweden. Invests in USA, Canada, Germany, Scandinavia, France, UK, BeNeLux. My aim is to only buy undervalued/fairly valued stocks and to be an authority on value investments as well as related topics.

I am a contributor for iREIT on Alpha as well as Dividend Kings here on Seeking Alpha and work as a Senior Research Analyst for Wide Moat Research LLC.

Disclosure: I/we have a beneficial long position in the shares of EMN either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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