The Knives are out for Kodak

by admin on June 24, 2009

The big business news today is that Warren Buffet says the US economy is still in a shambles with with no sign of recovery yet.

So on a hunch, I scooted over to Yahoo's business pages and checked the latest headlines on Kodak. The Financial Times is bringing out the hatchet and is looking for Perez's scalp. The money quote:

"Many once great companies grapple with technological obsolescence. But few destroy as much value in the process. Kodak began investing in digital photography in the mid-1990s after pioneering and then ignoring the technology to avoid cannibalising traditional film. In the past decade, however, it has ploughed 10 times as much into research and development as its current market value."

Note: Most of the article is by subscription only (hey, if somebody has access to FT content let me know if they get any nicer).

So is FT going overboard? Well, with the earnings report a little more than a month away, let's look at January 2011 futures numbers. The current stock price is $2.67. The ask price for a $2.50 call is $1.60. The ask price for a $2.50 is $1.35. Gees, I didn't think that was possible, you have a theoretical payout of $2.95 (of course if you look at the bid prices you get a payout of $2.30. And the real payout is $2.10 with a broker charging a dime for the two transactions)

So what you have then:

1. Payout at max asking price no commission: 110% (!!)
2. Payout at minimum (bid price) no commission: 86%
3. Payout at minimum with commission: 79%

Oh boy, I bet some future traders are working really hard right now on their spreadsheets. Even if you take into account that Kodak goes bankrupt this autumn (or this summer), you can still conceivably make money if you are a player. Let's say you have some strong nerves, cut a deal with the traders for a nickel vigorish both ways, and go for a split between bid and ask. That's gives you a call price of $1.42 and a put price of $1.20. So after the commission you realize $2.52 or payout of 94%.

But methinks, time is short: A matter of months.

{ 1 comment }

Michael J June 27, 2009 at 5:41 am

Here you go…
It is a bad sign when a company gets more attention for dropping a 74-year-old product than for anything else it has done recently. Eastman Kodak’s decision to cease production of Kodachrome film is a mere blip financially speaking in the decade-long decline of traditional photography, but it is a snapshot of a company that has managed change badly.
EDITOR’S CHOICE
Mama they’re taking my Kodachrome away – Jun-22
Kodak develops further cost-cutting measures – Apr-30

Many once great companies grapple with technological obsolescence. But few destroy as much value in the process. Kodak began investing in digital photography in the mid-1990s after pioneering and then ignoring the technology to avoid cannibalising traditional film. In the past decade, however, it has ploughed 10 times as much into research and development as its current market value. To be sure, today’s chief executive Antonio Perez and predecessor Daniel Carp talked a good turnround game, luring in savvy value investors such as once-legendary Bill Miller of Legg Mason who saw an iconic company at bargain prices. It still holds almost 15 per cent of Kodak, which has seen its shares drop 97 per cent in 10 years amid ejection from the Dow Jones Industrial Average.

Last quarter’s digital sales fell almost as fast as traditional film, both about 30 per cent, forcing a dividend freeze and layoffs. Used to dominating its industry, Kodak’s remaining competitive advantages are its brand name and the dwindling free cash flow from film plus some snazzy technology. Its newer products such as cameras and printers face far nimbler competitors than in its heyday though. The cash flow from Kodak’s declining film business helped mask this weakness, but it now faces financial strains and must play to its strengths. If any company should understand the need to focus it should be Kodak.

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