- Kodak shares have soared more than 1,000% in the past two days after announcing a turn toward drug manufacturing.
- The company received a $ 765 million loan from the government to help regain the drug supply to the United States.
- This situation looks like a bomb and a landfill, and investors should be cautious.
Nearly bankrupt film stock Eastman Kodak (NYSE: KODK) received a $ 765 million loan from the Trump administration to produce specialized pharmaceutical chemicals.
I don’t need to tell you what happened next.
Does anyone think that the increase in Kodak shares is justified?
The news, allegedly part of the White House push to “redirect” American drug manufacturing from China, caused Kodak’s shares to jump more than 1,000% to $ 36 from $ 3 in a matter of days.
On Wednesday, the stock peaked at $ 60.
According to FactSet data, business activity at Eastman Kodak rebounded in the days leading up to the big announcement. The company’s CEO bought approximately 46,700 shares a month before the news was released, raising questions about ethics and insider trading.
To make matters worse, Kodak has a long history of incompetent leadership and lacks the financial health to execute its new strategy.
This level of share price far exceeds any realistic valuation of the new income opportunity. Their a bomb and a landfill of presidential proportions. Investors must sell Kodak shares before the shares fall to the ground again.
Incompetent leadership limits KODK’s advantage
Eastman Kodak’s disappearance highlights the dangers of short-sighted and, frankly, stupid leadership. Kodak fell from blue chip status to bankruptcy court due to the digital camera, a product he invented but failed to capitalize on due to its much lower margins compared to photographic film.
Kodak filed for Chapter 11 bankruptcy protection in 2012 and exited the camera market. Almost a decade later, the company is still constantly changing, shifting from one crazy idea to another as it seeks to reinvent itself.
Most recently, Kodak moved into the cryptocurrency space with a mining rig that customers could borrow for $ 3,400 if they gave Kodak a 50% cut in profits. The concept received widespread mockery for not being profitable for miners, and was eventually shelved after Bitcoin’s price fell in 2018.
Weak finances make Kodak shares an incredibly risky bet
Two years later, Kodak wants to move to pharmaceutical manufacturing.
On paper, the company appears ready to execute its new strategy due to its large manufacturing footprint. According to CNBC, Kodak has 16 million square feet of manufacturing capacity, including 88 reactors and a water treatment facility.
The network alleges that film chemicals “are not so different” from the key starting materials (KSM) used to make drugs.
Although Kodak’s manufacturing prowess looks great, the company’s financial situation is a mess. The company will struggle to survive without continued government support or massive capital dilution.
In its 2019 annual report, Kodak highlighted substantial concerns about its ability to continue as a going concern. This company is plagued by titanic losses from operations and negative cash flow.
In the first quarter of 2020, Kodak’s revenue decreased 8% to $ 267 million. He reported a net loss of $ 111 million, with only $ 209 million in cash on his balance sheet.
Trump’s $ 765 million loan will be a much-needed lifeline for the company, but for how long? With Kodak’s core operations burning so much cash, that money could quickly evaporate before the new business takes shape.
Don’t be fooled
Kodak’s story has more holes than Swiss cheese, and investors should be careful when buying stocks at these prices, or frankly, at any price.
The situation has all the characteristics of a bomb and a landfill, and the CEO himself could face scrutiny over his stock build before the news of the loan is made public.
Here’s a video of nervous-looking Kodak CEO James Continenza speaking to CNBC on Wednesday. Be the judge. I would not touch this action with a 10 foot pole.
Disclaimer: This article represents the opinion of the author and should not be considered a commercial or investment advice of CCN.com. Unless otherwise indicated, the author has no position in any of the actions mentioned.
Last Modified: July 30, 2020 6:30 PM UTC
