Eastman Kodak Popped: What You Need to Know

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.

Want to keep closer track of Eastman Kodak's ups and downs? Add it to your watchlist.

The Fool has written calls (Bull Call Spread) on Cisco Systems, but Fool contributor Rich Smith has no position in any stock named above. The Motley Fool has a disclosure policy.

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Read/Post Comments (3) | Recommend This Article (9)

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  • Report this Comment On December 09, 2010, at 3:53 PM, jed71 wrote:

    I would also add there are 48 million shares short in EK right now, or 8.5 days to cover. Any sort of catalyst and this could blow much higher.

  • Report this Comment On December 09, 2010, at 4:13 PM, BradReeseCom wrote:

    You've got Cisco's ability to execute wrong.

    According to Cisco's most recent Form 10-Q (page 35) filed with the U.S. Securities and Exchange Commission on November 23, 2010:

    "Our consumer market experienced a sales decline on a year-over-year basis for the first quarter of fiscal 2011."

    Furthermore sequentially, Cisco's total sales declined by -$86 million with new product sales declining the most -$132 million followed by switch sales which declined -$57 million (the 2nd sequential switch sales decline in a row for a total decline of -$110 million).

    Additionally, when breaking down Cisco's new product sequential sales decline of -$132 million, the culprits fingered turned out to be security sales declining by -$131 million followed by video connected home sales which declined by -$95 million (the 3rd sequential video connected home sales decline in a row for a total decline of -$153 million).

    Finally, as of October 30, 2010 Cisco's total financial exposure to its Brazilian tax scandal stood at $2.150 billion (page 58 on Cisco's Form 10-Q) and continues to grow by $1.510 million every single day.

    Sincerely,

    Brad Reese

  • Report this Comment On December 10, 2010, at 1:32 PM, khaledmrd wrote:

    Kodak got thousand of patents in digital cameras, Inkjet, 3D, OLED, Touchscreen, Networks, Online services, Online communication , etc and after many companies for potential billions of Licenses fees and back Royalties in the next few years

    they also gaining momentum in Digital Printer for Home and small office & Commercial & Packaging in a big way in the last 12 months which means selling more Ink, paper, plates, Chemicals, etc

    Also they announced in 2011 their R&D center Shanghai China will be the biggest globally and they have their most attractive and selling Digital Gadgets in their History, Easyshare cameras and New Waterproof camcorders and wireless touch screen frames are few of more will come Jan 6 @ CES 2011

    also CEO announced during the CC a new biz models that are testing that will be unveiled during Feb.

    Kodak compliment the like of Dell, Lenovo, Acer, Asus to enable them to compete in a ig way with HP and Apple And canon , etc in Printers, Photography & Video cameras gadgets, Ink technology and Kodak Also got a great Software division for workflow, etc

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