Priceless?

Okay, so Kodak didn’t declare bankruptcy. Now what?

Kodak is a great example of the dilemma that faces value investors. The balance sheet of the company shows some value: current assets minus current liabilities, as of the last quarterly statement, come to about $2.50 per share. Add in the value of the patents they hold, the Kodak name, and their modest printing business, and there could be a lot of upside.

With the emphasis on “could.” Apart from management, no one really knows what the status of the company’s balance sheet is right now. And they can’t say anything, apart from standard robo-spokesperson blather. We should note here that SEC filings show management buying lots of shares, and not selling them. But is Kodak a “value trap”?

The debt is rated CCC by Standard & Poor’s—eight levels below investment-grade. Revenues have fallen from $14 billion in 2005 to $7.2 billion last year, with a decline of another 10% expected this year. At these levels, the company isn’t generating enough cash from operations to cover its interest payments, and so they’ve been strategically shrinking. But this is risky—a management error could sink the company.

So: do you buy the stock for less than the value of the cash on the balance sheet, and get the factories and patents thrown in for free, or do you steer clear of a troubled company in a dynamic industry that’s been behind the innovation curve for a decade? Or buy the debt for 30 cents on the dollar and split the difference?

Anyone who says value investing is low-risk isn’t paying attention.

Douglas R. Tengdin, CFA
Chief Investment Officer
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