Description

Kodak (KODK) can be a double from today’s stock prices.  If your portfolio is looking for exposure to benefit from disruptive “internet-of-things” technologies, KODK offers great optionality and upside for an undervalued price.  Kodak emerged from bankruptcy last year. At 5 times trailing EBITDA, you are not paying much for the optionality embedded in several new businesses KODK has launched from its patent portfolio.  Kodak owns one of the most valuable patent portfolios (some analysts estimate it to be worth $3B).  Furthermore, Kodak is focusing on less capital intensive businesses and licensing not only its IP but also its ubiquitous brand name.   

1. WHY COULD STOCK BE MISPRICED? KODK is a post-bankruptcy situation.  It has reported positive EBITDA but negative EBIT. Its growth business missed guidance this year. There are wrong perceptions about KODK’s current business. Recent sales, spin-offs, discontinued operations and fresh start accounting obfuscate the true economic numbers of capex needs, depreciation and amortization amounts of the business moving forward.  Company does not give guidance for 2015.
2. WHY WILL IT GO UP FROM HERE? Kodak is focusing its business to a less capital intensive portfolio of businesss.  It is looking into licensing its IP and brand names.  It has new products and a new CEO.  Kodak has transformed into a B2B company focused on imaging for business.  Kodak has launched several new disruptive businesses  (in various stages of maturity) with several new breakthrough solutions for the product goods packaging, graphic communications and functional printing industries.  Increased efficiencies, cost savings will generate a predictable, positive contribution of over $100 million in 2015. Most of these strategic businesses have a razor and blade component to it.  First you sell the systems and achieve market share, then you sell recurring consumables.
3. WHO ARE KODK’s CUSTOMERS? Customers are mostly businesses in the following vertical: commercial print, direct mail, book publishing, newspapers and magazines, packaging, motion picture entertainment, printed electronics, and the aerial and industrial film markets, creative, in-plant, data center, consumer printing, commercial printing, packaging, newspaper and digital service bureau market segments with a range of software, media and hardware products that provide customers with a variety of solutions.  On a smaller scale, they also sell to the government, pharmaceuticals, healthcare, consumer and luxury goods, retail and finance vertical.
4. HOW DOES KODK MAKE MONEY?   Kodak is narrowing its business to a more focused portfolio.  Kodak spun off its Personalized Imaging and Document Imaging business last year.  Kodak’s portfolio of businesses can be broken down to the Mature segment (think of it as in run-off mode), and the Strategic growth segment (think of it as core, growth segment).

Mature Segment (run-off mode) – represents 18% of total sales. Composed of the Entertainment Imaging&Commerical Films or EIC, and Consumer Inkjet System or CI.

*Entertainment Imaging & Commercial Films or EIC (Mature, 11% of  Sales)  Kodak sells motion imaging proucts (camera negative, intermediate, print, archival film), aerial and industrial films, KODAK printed circuit board film, polyester film, specialty chemicals, inks, solvent recovery products directly to studios, laboratories, independent filmmakers in the professional motion picture and exhibition industries.   In layman's terms, this is the analog movie film business which is being replaced by digital video. However, movie studios recently struck a deal with Kodak to commit to buying film from Kodak, the only supplier of these products in the world.   

**Consumer Inkjet System or CI (Mature, 7% of Sales) Kodak sells ink and consumables to its installed base of consumer inkjet printers.  Kodak has stopped selling consumer inkjet computers.

Strategic Business (Core and Growth) Segment – represents 82% of total sales. Composed of Graphics or G, Digital Printing or DP, Packaging and Functional Printing or P, Enterprise Services & Solutions or ES, Intellectual Property & Brand Licensing or IP

*Graphics or G: (Growth, 52% of Sales)    Kodak sells front-end controllers, production workflow software (PRINERGY brand), CTP output devices (KODAK TRENDSETTER, SQUAREspot, and ACHIEVE brands), service and digital plates to businesses in the pre-press segment of the digital offset printing market via direct and indirect channels. Its newest product is the SONORA plate, which delivers cost savings and efficiency and promotes customers’ sustainability practices and credentials as it does not require processing chemistry.  

**Digital Printing or DP: (Growth, 21% of Sales) Kodak sells Inkjet Printing Solutions (KODAK PROSPER brand) and Electrophotographic Printing Solutions (NEXPRESS and DIGIMASTER brand) equipment and related consumables and services to the publishing, commercial print, direct mail and packaging industry via direct and OEM channels.

***Packaging and Functional Printing or P: (Growth) Kodak sells packaging printing equipment (FLEXCEL brand) and Functional Printing (touch panel sensor films, micro 3d printing) related consumables and services, as well as printed functional materials and components to the packaging industry.

****Enterprise Services & Solutions or ES: (Growth) Kodak sells print and managed media services and software solutions, brand protection services and software solutions, document management services and software solutions to the government, pharmaceuticals, healthcare, consumer and luxury goods, retail and finance vertical.

*****Intellectual Property and Brand Licensing or IP: (Growth) Intellectual property and KODAK brand licensing includes licensing activities related to digital imaging products and certain branded licensed products

5.    RECENT HIGHLIGHTS OF THE MATURE AND STRATEGIC SEGMENTS

Mature Segment:

Mature businesses continue to decline with lower film and consumer inkjet ink sales

(29% decrease year-over-year; 37% decrease YTD). Kodak recently obtained commitments from the movie studios to continue to buy film from Kodak.  Kodak is the only remaining supplier of film in the movie industry.

Strategic Segment:

– SONORA Plate unit volume increase of approximately 200% year-over-year.

– Total Plate unit volume up almost 5% year-over-year.

– CTP unit growth of 6% year-over-year.

– FLEXCEL Plates revenue growth of 34%.

– Revenue recognition of 3 PROSPER systems and a total installed base of 38

Systems.

6. NEW INNOVATION/NEW PRODUCTS

Kodak’s SONORA offering has established a leadership position in the Graphics segment.  It has reaching  underlying and recurring profitability of the business. In 2014, SONORA Plate unit volume increased approximately 200% year-over-year.

Reviews have been good. http://www.democratandchronicle.com/story/money/business/2014/05/16/kodak-sonora-printing-plates/9175115/

The new product in the Packaging printing business is the FLEXCEL NX offering which was a start-up in 2009.  6 years later, FLEXCEL NX is a significantly profitable business in Kodak’s portfolio with 9 to 10% market share, proving what we're able to do in large markets in relatively short order with our technology innovation. There are about 400 installed FLEXCEL NX Systems out there, and Kodak is seeing 34% growth of the packaging consumables on it. FLEXCEL Plates had revenue growth of 34% in 2014.  The primary value proposition of FLEXCEL is that the resolution and output is visibly better than the competition, and that's how you go from 0% to 9%.

Reviews have been positive: http://www.flexoexchange.com/forum/viewtopic.php?f=3&t=567&start=15

This is an example of better technology going in, and KODK achieved that through using our SQUAREspot Technology and a series of other technologies. But on top of it, by having a CTP that is integrated with the plate. KODK’s integrated system has an advantage over competitors who either sell CTPs or sell plates, but don't have the integrated system. KODK’s advantage is increasing over time as more people see the output of this product.

https://www.youtube.com/watch?v=p1JIfGtxy6k

The PROSPER Press features STREAM Inkjet Technology, which delivers a continuous flow of ink that enables constant and consistent operation, with uniform size and accurate placement, even at very high print speeds.

Our PROSPER inkjet systems business is early in its life cycle, but KODK is on its way to building the business with good scale and profitability - placing equipment with direct customers as well as a growing base of OEM partners. KODAK will grow annuity revenue streams as we enter 2015. Revenue recognition of 3 PROSPER systems and a total installed base of 38 Systems. We have 40 installed systems out there. The systems range in price between roughly $2 million and $3.5 million a piece. And then, we have components that can range from between $100,000 and $200,000 per component, and often our only components are sold for hybrid, digital printing environments and offset, primarily. Those systems can be sold in multiple units of each. The annuities, which is the ink, is quite profitable, and that business is growing in double digits in annuity, and that's exciting. And the page growth that I referenced in my remarks is up over 50%, and that bodes well for this increased installed base and people using the applications to print more, okay? We sell presses, and we noted about 40 presses out in as an installed base. And then, we also sell components. On the components, they have fairly high margins and pretty good EBITDA. But the presses, we want to get out there in order to sell consumables, which are highly profitable going forward.

You can study a discussion here: http://www.colorprintingforum.com/digital-presses/inkjet-webpresses-7114.html

One revolutionary product in functional printing market is Kodak’s new micro 3D printing capabilities and trouch screen sensor solutions. This business is in start-up phase, where their process is still harder to forecast. They are developing it with 2 OEM partners Kingsbury and UniPixel. This will revolutionize 3D micro-printing and how integrated electronics are built.

Brand and IP licensing opportunity.   The real wildcard is Kodak’s patent portfolio. Before filing for bankruptcy, analysts estimated Kodak’s patents are worth over $3 billion.  Kodak sold some patents for $525 million but is looking to build an annuity income business as opposed to non-recurring patent sales.  Some of the  new products described above are a combination of Kodak’s unique IP that gives Kodak a very good competitive advantage.  In addition, the KODAK brand name is synonymous to the generic dictionary word for photography in many countries.  Kodak is looking to license its brand name KODAK to select group of manufacturers and products.

Kodak also recently announced it is reorganizing into 5 divisions to make if faster moving.  

http://finance.yahoo.com/news/kodak-sets-structure-drive-growth-133000952.html

7. NEW MANAGEMENT

Mr. Jeffrey J. Clarke is the new Chief Executive Officer of Kodak.  He seems to have a good background in both capital allocation (private equity) and operations (Orbitz, HP, Compaq, Computer Associates, Compuware, Red Hat).  Prior to joining the Company, Mr. Clarke was a Managing Partner of Augusta Columbia Capital, a private investment firm focused on middle market technology and technology-enabled business, which Mr. Clarke co-founded in 2012. From 2006 to 2011, Mr. Clarke served as the Chief Executive Officer of Travelport, Inc., a private technology firm where he successfully launched an IPO for Travelport’s Orbitz business. Mr. Clarke served as the Chief Operating Officer of CA, Inc. from 2004 to 2006, and an Executive Vice President at Hewlett Packard Company from 2002 to 2003. Mr. Clarke has also served in various financial and operational roles at Compaq Computer Corporation and Digital Equipment Corporation, including Chief Financial Officer at Compaq. Mr. Clarke will continue to serve as Chairman of Orbitz Worldwide, a global online travel agency, and on the boards of directors of Red Hat, Inc., an enterprise software company, and Compuware Corporation, an enterprise software company.

8. INSIDER BUYING

Marx Moses, a 10% owner bought $563,500 worth of shares on Jan 28-29, 2015.

9.  Projected EBITDA less Maintenance Capex for 2015

In the recent call, management indicated that Operational EBITDA for 2014 should reach $145MM to $165MM.  Management also indicated a savings of about $100MM to be achieved in 2015.

The mature businesses are in run-off and the depreciation and amortization will not need to be replaced with cap-ex. 

REVENUES                     2014 YTD

Mature Businesses                 $259MM
Mature Oper EBITDA           $49
Growth Businesses           $1,314
Growth EBITDA                       $70                   

Projected 2014 Total

Revenues                                  $2.1BB - $2.3BB
Total Operational EBITDA  $145 to 165MM

+ 100MM savings in 2015 coming from:

·       SG&A improvement of $40MM and total improvement of $50MM from 2014

·       Global benefits expense savings of $20MM

·       $4MM in savings with the move from 5 to 4 sites.

·       $20 to 25 million in annual operational savings expected  by Q3 2015.

Here are my estimates for Kodak

Capex needs

Fresh Start accounting, spin-offs, discontinued businesses, restructuring, transforming to a B2B company have obfuscated the true capex needs of this business moving forward. I estimate that KODK will require 5% of Revenues for Capex and another 5% of Revenues for R&D.  

I think EBITDA less maintenance capex can reach $150MM by 2016.  Applying a 10 times multiple gives you $1.5 billion in enterprise value, or $37 per share stock price.

My valuation does not include the properties – Kodak Tower building in Rochester and various countries, as well as the patent portfolio.

Catalyst

• Insider buying
• Cash flow improves as company's post-bankruptcy numbers become clearer to Wall Street
• Kodak has transformed to a B2B business 
• Kodak's business is a razor and blade model.  Once it reaches an installed base of its systems("razors"), the recurring revenues from sales of consumable products ("blades")will give a more predictable cash flow model. 
• Kodak starts licensing its brand and ip portfolio to other manufacturers and products.