10-Minute Investment Autopsy No. 9: Eastman Kodak
Jim Chanos saw through Kodak's 'transformation' story in 2005
If you haven’t read the guide to the 10-Minute Investment Autopsy series, you can find it here. You will get the most out of each case if you:
Pause after the “Original Thesis” section and think about what you would have done
Engage with the discussion questions and other members in the weekly thread designed to help you further improve your investing process
The Original Thesis
Who: Jim Chanos
When: July 2005
What: Eastman Kodak (ticker: EK)
The Thesis:
Classic value trap in the midst of an analog-to-digital transformation
Spending on printing photos has dropped dramatically
Cash flow has declined rapidly, from $1.5B in 2002 to $1B in 2003 to only $500M in 2004
Company is on its way to having no cash flow in 2005 and negative cash flow in 2006
Analog profitability was enormous, while the profitability in the digital business that management is repositioning the company towards is elusive
Kodak’s other businesses, such as Healthcare, are also under secular pressure as X-rays are going digital
Company is making $1B in acquisitions per year just to keep revenue flat, which makes it a maintenance expense
Wall Street estimates $2 in EPS in 2005, Jim thinks that the company isn’t making any money on a real economic basis
Jim thinks the stock will be a value trap all the way down, as Polaroid was
These are the highlights of Eastman Kodak then-recent financials up to the point when Jim was presenting his thesis:
This is the stock chart up to the time when Jim presented his thesis:
Pause here. Think through the thesis and the facts and decide what you agree with, what you disagree with and whether you would invest based on the information available.
What Happened (Just the Facts)
Kodak’s financials following Jim’s presentation were as follows:
Between 2004 and 2011, sales declined at a 17% CAGR and profits and FCF turned negative.
Kodak filed for bankruptcy, wiping out equity shareholders
There is a lot more to the case:
The Autopsy - the reasons for what happened
The Lessons that you can apply to your own investing
Discussion Questions for you to think about and discuss with other thoughtful investors in the weekly case thread