On Tuesday, the actions of former photography giant Eastman Kodak (KODK) staged a massive rally after the company announced the signing of a letter of interest with the United States International Development Finance Corporation (“DFC”). :
Under the direction of President Donald J. Trump, the executive director of the US International Development Finance Corporation, Adam Boehler, will sign a letter of interest today to provide a $ 765 million loan to Eastman Kodak Company (Kodak) to support the launch of Kodak Pharmaceuticals, a new arm of the company that will produce critical pharmaceutical components. The bill would mark the first use of a new authority delegated by President Trump’s recent executive order allowing DFC and the US Department of Defense to Collaborate in support of the internal response to COVID-19 under the Act. Defense Production.
After peaking at $ 11.80 earlier in the day, the stock ended the session at $ 7.94, a more than 200% increase in extremely heavy volume.
Photo: DFC website
As the stock closed well below its peak, I expected the recovery to fade further in later hours, but unfortunately POTUS itself frustrated me by congratulating the company at its press conference that took place during the hour session later:
Today, I am proud to announce one of the most important offerings in the history of the American pharmaceutical industries. My administration has reached a historic agreement with a great American company: remember this company; It is called, from the good old camera age, the good old days, to start producing critical pharmaceutical ingredients. It’s called Kodak. And it’s going to be right here in America.
So I want to congratulate the Kodak people. They have been working very hard. Members of my administration are present in Rochester right now, Rochester, New York, a good place. And they are trying to finalize this ground breaking deal, and they will announce it.
I want to thank Governor Andrew Cuomo and his representatives. We have worked very well together on this agreement. It’s very important. It will be a great deal and a great deal for New York and a great deal for Kodak.
(…)
Kodak will now produce generic active pharmaceutical ingredients, which is a big problem. By using advanced manufacturing techniques, Kodak will also manufacture the key starting materials that are the building blocks of many drugs in a cost-effective and environmentally safe manner. We will be competitive with almost all countries, and soon with all countries.
Once this new division is fully operational, in addition to all the other plants we’ve recently opened with other companies across the United States, it will produce up to 25 percent of all the active ingredients needed to make generic drugs in the U.S. . That’s a large amount: 25 percent.
As the president’s comments made their way on social media and television, a second wave of shoppers began to chase the actions, prompting actions to end the session after business hours by 60%.
But the ball really started to roll during the Wednesday session with the shares opening 130% above Tuesday’s closing price and soaring higher in strong morning trade. The shares peaked at $ 60 and after a very volatile afternoon session with some momentum traders who apparently turned to the Chinese game EV Kandi Technologies (KNDI) still ended the day at $ 33.20, over 300%.
Frankly speaking, I have no idea why exactly Eastman Kodak was chosen by the Trump administration, a company that otherwise would likely have ended up in chapter 11 again next year. The statements made in the most recent 10-Q speak for themselves:
Kodak faces liquidity challenges due to operating losses and low or negative cash flow from operations, needs for guarantees and restrictions on the movement of cash from China. Cash flow from operations in 2019 benefited from improvements in working capital and individual transactions that occurred during the year. The Company’s Convertible Bonds do not require any debt service until the conversion or maturity on November 1, 2021. The Series A Preferred Shares must be exchanged on November 15, 2021 if they are not converted before that date. Kodak has significant cash requirements to finance operations, restructuring programs, pensions and other post-retirement obligations, and other obligations.
(…)
The current cash balance outside of China, the recent trend of negative operating cash flow, maturity and redemption dates in 2021 for Convertible Bonds and Series A Preferred Shares, increased the challenges in managing cash during the The COVID-19 pandemic and the general uncertainty regarding the return to positive cash flow raises substantial questions about Kodak’s ability to continue as a going concern.
After this week’s events, neither the $ 100 million in outstanding convertible notes nor the $ 200 million in convertible Series A convertible preferred stock will no longer be a major issue.
In fact, convertible note holders receive a significant payday as notes can be converted at any time at a conversion price of just $ 3,175 per share. The full conversion of the notes would result in the issuance of approximately 31.5 million new shares, increasing the company’s total outstanding shares by more than 70% to 75.2 million.
Even holders of the company’s Series A preferred stock could convert with a solid profit now, as the conversion price was set at $ 17.50 per share. The full conversion would require the company to issue another 11.5 million shares.
Assuming a total conversion of the company’s convertible debt and outstanding preferred shares, the total share count would approximately double from the current number of 43.7 million.
On a fully diluted basis, Eastman Kodak’s market capitalization is nearly $ 2.9 billion. Adding the new DFC debt, the value of the company is estimated at approximately $ 3.5 billion.
In a recent Barron article, the former Baird Al Root strategist provided a “finger approach in the air“of the potential value of the new business segment:
Is the stock too high? Kodak’s new business is generic drug ingredients. Generic drug manufacturers trade approximately 1.5 times sales. Of course, Kodak still doesn’t have the business. And when you do, all of your sales will not be drug related.
Generic drug makers take about $ 1 in assets to generate 40 cents in sales. Based on that, Kodak’s new $ 765 million loan could generate between $ 300 and $ 400 million in sales. That would, in theory, be worth around $ 450 million to $ 600 million in market value.
That’s a finger-in-the-air approximation. And investors should add the debt that comes by valuing the entire company. There is simply no great way to know where the stock can go so early in its transformation.
Using this approach, the stock seems to be way ahead of itself, but the momentum crowd couldn’t care less about the fundamental considerations, as long as there is a steady stream of bigger fools buying the stocks at even higher prices.
And there seem to be plenty, at least judging by Robinhood’s stock-tracking tool from the next-generation online brokerage platform:
Source: Robintrack.net
According to a recent Business Insider article, retail investors now account for up to 25% of stock market activity compared to just 10% in 2019, as brokers have reduced fees and COVID-19-induced locks They provided people with the time to start their investment career.
The growing crowd of retail investors seems to be the main reason behind the increasingly violent protests of momentum these days. Powered by Tesla’s impressive stock winning streak (TSLA), retail investors are currently across the stock market looking for the next multibagger.
Bottom line
Whatever may have been the reason behind the Trump administration’s decision to rescue Eastman Kodak, the proposed transaction will not only save the company from probable bankruptcy next year, but could ultimately make Kodak a viable business after years of largely unsuccessful transformation efforts.
But with the company’s fully diluted market capitalization approaching $ 3 billion and a major dilution of the early conversion of convertible debt and preferred stocks likely ahead, the stocks appear to be trading well ahead of themselves now. .
Momentum stampedes tend to rage for up to three days, and the rally generally begins to run out of steam over the course of day three. This would be the time to enter a short position, but investors should wait patiently until both volume and price have dropped considerably.
As always, don’t bet on the farm in short positions and properly manage your risk.
Divulge: I / we do not have positions in any mentioned stocks, but I can start a short position in KODK for the next 72 hours. I wrote this article myself and express my own opinions. I receive no compensation for it (other than Seeking Alpha). I have no business relationship with any company whose shares are mentioned in this article.
