ByWILL SWARTS
The Company
The News
Investors ordered up reprints of
Eastman Kodak
Shares closed up 14% Tuesday, the stock's greatest one-day increase in 20 years, thanks in large part to a short squeeze by shareholders who've profited from the stock's 50% fall over the past 52 weeks. About 49 million shares, or 17% of Kodak's public float, were held short as of May 27.
Rochester, N.Y.-headquartered Kodak announced Tuesday that its board had approved the $1 billion repurchase plan, equivalent to 25% of its shares. It also said it received a tax refund from the Internal Revenue Service of $581 million. The refund stems from the audit of claims filed for the tax years 1993-98, and includes a refund of past federal income taxes paid of $306 million and $275 million of interest earned on the refund, the company said.
"We strongly believe that at the current price, the purchase of our own stock is an appropriate use of our cash and will further enhance long-term shareholder value," Chairman and Chief Executive Antonio Perez said in a statement.
Kodak reports second-quarter earnings on July 31. For the first quarter, the company lost 39 cents a share, much worse than Wall Street's consensus estimate of a three-cent loss.
The Analysis
When Kodakchrome film was king and the Brownie camera added millions of prints to family photo albums, Kodak was on top of the world. That robust picture, with pricey film sales creating recurring revenue, faded rapidly as digital cameras displaced film, a shift that appears permanent.
"It's been a long and painful story for Kodak," says Morningstar analyst Irina Logovinsky. "They used to be almost a monopoly and had only one competitor in Fuji. Through a very long and slow process, any advantage Kodak had was slowly eroded with the advent of digital cameras."
The business model for digital camera sales is vastly different and it doesn't produce recurring revenue, she says. Not only that, as digital imaging technology gets cheaper, the cameras themselves become commoditized, so low-end models may even lose money for manufacturers.
Alternative ventures, such as a medical technology unit sold off last year and a commercial printing business that's struggling while the broad economy falters, have failed to replace the cash cow of dwindling film sales, says Logovinsky. New technology that was supposed to boost cellphone cameras hasn't really affected Kodak's fortunes, nor did a move to low-end printer manufacturing.
Despite the tectonic shift, Jeff Embersits, an analyst at Shareholder Value Management, gives Kodak's management credit for using all the financial engineering tools in its corporate array to ward off the big slide for as long as it was able.
Shares haven't topped $25 since November and have been halved in value over the last seven months.
"For almost a year, they were able to goose results there were writeoffs and write-downs and other things they could do," he says. "The first quarter when the rubber really hit the road was last November. As soon as people got a look at all these operations without all the accounting moves, that's when the stock really first took a hit."
The Bottom Line
The buyback and tax settlement aren't smoke and mirrors, but as any photography buff knows, images can be manipulated.
"It's a good pop," Embersits says of Tuesday's big jump. "But there isn't any indication that their business is getting better."
Logovinsky put the stock under review on June 9, and says the buyback will affect her evaluation of a fair value estimate.
"At the time, I didn't think the stock was that cheap," she said of her view before the buyback plan. "I can't say the net effect on my fair value estimate would be dramatic. It's not favorable."
Pulling a quarter of Kodak's ailing shares off the market won't hurt shareholders at all, says Embersits, but neither will it create lasting value.
"It really doesn't change the fundamentals of the business," he says. "Frankly, I'd be looking at it to short a little bit."
Tuesday may be the breather some diehard investors need to get out. Those with a much higher risk tolerance could be rewarded once the short squeeze fades.
"It's real money they're returning to shareholders," Embersits says. "The question is, how long will the buyback support the stock if the underlying operations are still weak? It's sort of a Band-Aid. It's nice to have, but it really doesn't help the long-term viability."
This is the time to make a move on Kodak, or risk being overexposed.
Also See:
- LinkedIn
- Fark
- del.icio.us
- Reddit
X