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Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Here's a headline you don't see every day: Shares of Eastman Kodak (NYSE: EK ) soared 10% today. The question is: "Why?"
So what: No one's quite certain just what's behind the run-up. All we know at this point is that two hours into Thursday trading, more than three times as many Kodak shares have already changed hands as normally do in an entire day. According to StreetInsider.com, there's "takeover chatter" afoot. But the exact nature of the chatter, and who's supposedly chatting up Kodak management, remains a mystery.
Now what: Could it be true? Absolutely. At an enterprise value-to-EBITDA ratio of barely 1.0, Kodak's far cheaper than the usual takeover metric, which holds that anything under 6x-7x or thereabouts is "cheap." I could certainly see a buyout shop like Blackstone (NYSE: BX ) or KKR (NYSE: KKR ) anteing up at that price.
The company's also generating decent free cash flow -- not nearly as much as it claims its "net profit" should be under GAAP accounting standards, but still firmly in the black. With a price-to-free cash flow ratio of 8.1, Kodak would certainly qualify as "cheap," but for the fact that almost no one on Wall Street thinks it's earnings will do anything but shrink over the next five years. Put a brand name like "Kodak" in the hands of someone who knows how to grow a business -- like Cisco (Nasdaq: CSCO ) , which has been moving into consumer electronics lately with purchases like "Flip" camera-maker Pure Digital -- and this might even turn into a viable business.
So on balance, I'd say this rumor's got a core of truth to it. If you're patient and not easily upset if the rumors don't play out immediately, and can stick around for the value to be realized, buying Kodak today just might develop nicely for you.
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