Eastman Kodak’s Wild Ride Has Just Begun

Eastman Kodak, A Company On The Brink Of Transformation

On Friday, July 28th a press release from Eastman Kodak (NYSE:KODK) announced the company had been granted a letter of intent from the U.S. International Development Finance Corp. The letter approved a $765 million loan to Kodak under the Defense Production Act for the production of starter and base-chemicals for the pharma industry. The news was, is, game-changing for Kodak because it will bring this company out of a slow death-spiral and back to national relevance.

Kodak has no prior pharma experience but decades of chemical production experience and existing infrastructure so the move seems like a natural fit. Kodak isn’t going to be researching, developing, or experimenting with chemicals, only producing the base materials we now get mostly from China.

Needless to say, the news sent the stock up by the thousands of percentage points but trouble was just around the corner. Within days of the announcement allegations of improper news handling, and insider trading brought the market to its knees. Now, with the shares down more than 80% from the peak, it looks like a good time to start buying into what could be a very lucrative long-term opportunity.

The Kodak Transformation Story Is Still Developing

Shares of Kodak made a head-spinning rally and about-face a few weeks ago but the wild ride is only just beginning. A new report from an independent investigator exonerates the company from illicit wrong-doing in relation to the Federal DPA loan. Although there were missteps made, none appear to be criminal in nature.

“the committee recommended Kodak's legal department to undertake additional hires, noting a lack of resources could be the root cause for the existence of some outdated policies. Policies should also be updated in regards to insider trading, the options-grant process and the process for managing contact with the media and other third parties.”

The special committee, AKIN GUMP STRAUSS HAUER & FELD LLP, blamed disclosure issues related to alleged insider trading on a junior employee. The employee was able to alter a document and make it look like it wasn’t embargoed. In regards to allegations of insider trading, the committee concluded there was no intent to manipulate the timing of options grants and a timely charitable gift by board member George Karfunkel doesn’t violate SEC rules. What this means for the company, assuming the SEC comes to the same conclusions, is Kodak’s game-changing transformation may still take place.

No Government Loan, But That Doesn’t Mean The End For Kodak Pharma

The DPA loan was revoked not long after the allegations began to surface and it may not ever be available again. But that doesn’t mean Kodak and Kodak Pharma are down for the count. The company is still in a position to make this stunning transformation it just needs to find the right partner. Kodak CEO James Continenza said it himself, Kodak can be competitive in pharmaceuticals, it's already got a factory with its own power, steam, waste recovery, and rail system. "The infrastructure is there. I'm not paying for that. Those are huge costs."

Money manager D.E. Shaw & Co. see value in this opportunity. The company just disclosed a passive 5.2% stake in the company.

The Technical Outlook: Kodak Is Ready To Melt-Up But There Are Risks

Shares of Kodak jumped more than 25% after the special report was released and look like they could continue higher. The risk is that resistance near the $10 level is probably pretty strong and may keep prices in check until more good news develops, and it may not. While Kodak is in a good position to make this turnaround it hasn’t made it yet. Share prices could just as easily return to the $2 level as not but I don’t think that’s going to happen. There’s value in Kodak’s infrastructure if nothing else, and there is a need for domestic pharma production so somebody’s going to move on this, it’s just a matter of time.