Text size
Kodak is making a foray into generic drug ingredients
Daniel Acker / Bloomberg
Eastman Kodak’s shares are enjoying a renaissance. Shares rose 160% on Wednesday morning, taking advantage of the incredible gain of more than 200% on Tuesday. New capital and new business are the reasons for the surprising increase. The question for investors now is how high can stocks go?
It is not an easy question to answer. There are no analysts covering the company or target prices to help investors. Additionally, the company is taking a government loan to build a drug ingredients business. Kodak (ticker: KODK), has been and is in the image business. Valuing a great new business is difficult for any investor evaluating a company.
Kodak’s shares traded more than $ 17 in 2015 on its return from bankruptcy protection, trading at approximately 0.4 times sales. The company is quoting sales for more than 1 time now, at more than $ 21 a share, adding the new debt the government is providing. The old highs have already been overshadowed.
Is that 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 sales of between $ 300 and $ 400 million. That would, in theory, be worth around $ 450 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.
Movement makes sense. The loan, in one sense, more than doubles the size of the business overnight.
Kodak was the most popular action on Robintrack on Tuesday, a website that tracks changes in Robinhood’s stock trading accounts. More than 25,000 accounts added positions. General Electric (GE) was the second most popular share, with around 9,600 new positions started.
More of buying than selling is the technical reason why stocks go up. The amount of purchases helps explain how much a stock is increasing. GE has a market capitalization of more than $ 60 billion. Its shares rose 2.6% on Tuesday, in part due to higher interest from individual traders. Kodak is a microcap stock worth less than $ 350 million at Tuesday’s closing price. It doesn’t take much to move stocks.
Kodak shares have now risen more than 350% so far this year, barely comparable to returns from the S&P 500 and the Dow Jones Industrial Average. What will be seen from here is unknown. Investors, however, must prepare for volatility.
Trading of Kodak shares was halted due to volatility, but resumed after about 5 minutes. It was probably just an opportunity for investors to catch their breath.
Write to Root at [email protected]
.
