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With the market being up so much from the 2009 lows, finding beaten down contrarian names can be challenging. There are a few name out there, but for the most part stocks are up quite a bit from the lows in early 2009. One exception is Eastman Kodak, which is trading for just a little above $3, right around its lows over the last quarter century. Is there any way this once iconic name can get itself back to past glory?

Why Is It Cheap?

Kodak has had issues over the past few years. The company was late to the digital camera revolution, being reluctant to change partly because of their dominance in traditional film. The company also sold a lot of photo paper, another part of their business that has been hurt by people printing less pictures. Because of the declines in revenue, the company has been losing money for the past few years.

Industry Outlook

Kodak has 3 divisions. The first is digital cameras, printers, and the like, which is closely tied to consumer demand. Kodak has been doing well in their consumer products division, mostly due to their new inkjet printers. More on that later.

The second division is the movie film business, which has seen declining revenue and profits over the past three years. I keep hearing rumblings about how movie theaters are finally going to switch to digital projectors, but so far we haven’t seen many make the switch.

The third division of the company is the graphic communications division. It works with printing customers, newspapers, etc. to supply these companies with printers, scanners and other stuff they need to produce high quality printing. Obviously this segment will decline as more and more content is moved exclusively online.

Dividend

Kodak paid a dividend up until late in 2008, when they finally pulled the plug on it. The company is currently not profitable, so don’t count on the dividend coming back anytime soon. If they do ever recover, the dividend would probably become a priority, but don’t hold your breath.

Balance Sheet

The company has been burning through assets for the past 4 years, seeing total assets fall from over $13B to only $6.2B. That’s a drop of over 50%. Liabilities are down as well during that period, falling from $10.6B to $7.3B. What that means today is the company is trading at a negative book value.

The primary reason for that is a $3.3B liability on the balance sheet which is simply stated as “other total liabilities”. A quick look at their latest annual report explains that most of that liability is the company’s pension plan, with the rest mostly being made up of deferred tax liabilities and reserves for environmental liabilities.

The company has managed to keep debt relatively steady during the past few years. They had to get some debt that has pretty expensive rates, but most debt doesn’t come due until 2017. Refinancing won’t be a problem for the next little while.

Earnings

2010- ($0.60)

2009- $0.04

2008- ($0.49)

2007- $0.27

These are “normalized earnings”, with all the special charges stripped out. Kodak has done all sorts of restructuring over the past few years, skewing earnings in all sorts of weird ways. Analysts are expecting a loss of 45 cents per share next year.

Insider Activity

Insiders have been buying some shares lately, but not enough to make much of a difference in my perspective. Officers of the company really don’t hold that many shares, with the leading officer holding 177000 shares, having a market value of less than $1 million. Insiders don’t own a significant part of the company.

Price Appriciation

Over the past 10 years, investors in Eastman Kodak have felt all sorts of pain. The company hit a high of $50 10 years ago, spent a bunch of time in between $20 and $30 for a few years, before falling down to current levels.

If I were to set a target price based on the chart alone, I’d set it in the low 20s. That would represent a very¬†achievable goal if the company did find a way to recover.

Summary

Kodak is in desperate need of some sort of superstar product to raise it from it’s doldrums.

They’ve had some success with their new inkjet printers. These printers use considerably less ink than their counterparts from HP or Lexmark. Even though they sell for considerably more, people are buying them because of the ink savings. They’ve also got some decent digital cameras featuring a touchscreen display, which are selling.

The other thing Kodak has won a patent dispute against Samsung and LG in 2009 for $864 million. They currently have a lawsuit against both Apple and RIM accusing them of infringing on Kodak’s patents as well, which isn’t looking too promising for Kodak. Still, the company owns over 1000 patents in the digital photography space, and these lawsuits will probably continue as the company struggles. The company expects revenue from these sources in the future, but obviously have no idea just how much.

The company is burning cash. At the current burn rate, the company still has cash left for at least a few years. The losses they’ve experienced are mostly due to asset writedowns, the most recent being a $600M goodwill writedown. I like that the company is restructuring and taking the steps needed to get rid of non-performing assets.

While this is only the preliminary research I’ve done, I’m leaning away from buying this stock. Revenues are increasingly dependent on suing competitors over patent disputes. While there are some positive things going on, debt is still excessive and I can see no¬†catalyst that will bump the company into profitability. Too much of cash flow is being used to pay the interest on the debt. I will spend some time reading the annual reports to give myself a more complete picture of the company. For now, the stock is on my watch list.

I do not own shares in any company mentioned in this post.

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