Stock Buyback Triggers Rare Rally in 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.

"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.