Response To Critic Of Our Eastman Kodak Post

by: Inelegant Investor - December 30th, 2011   2 Comments

Recently, we’ve taken a dim view of ’s(EK) prospects.  As we wrote here and here, we believe the company is most likely past the point where a turnaround outside of is possible. A commenter assuming various names, most recently “Truthseeker”, has expressed his criticism in a most disdainful and discourteous manner.  While we object strenuously to his lack of civility, and may delete future comments that do not take a civil tone(though we will never delete comments that merely disagree with us), we thought we would pull up  his comment and respond to it.  We encourage dissenting opinions and we all benefit from civil debate.

Truthseeker wrote:

Are you aware:

has received $1B offer in rescue financing from bondholders
Kodak has $2B+ in NOLs to offset income derived from patent sales
Kodak still has billions in non-core assets to sell if necessary to raise additional cash
Kodak has mentioned it can slow its global digital expansion if necessary to minimize cash burn

Didn’t think so..do some research before jumping on the bandwagon bashing a 70 cent stock  ..where were you when Kodak was trading $80 and when you could actually add some value? Pathetic.

Unlike in his previous comments, this time, Truthseeker actually stated some facts together with his offensive and discourteous tone.  Where I was when Kodak was at $80 is irrelevant; I wasn’t publicly advocating neither buying nor selling. I write infrequently and on topics that resonate with me at the moment. There’s still $.70 more for this to go down, and my initial post was reacting to an unwarranted jump in the share price. Where were you at $80?

As to your claims:
$1B offer in rescue financing from bondholders: bondholders have no reason to preserve value for equity holders, especially since it means keeping pension liabilities. Any bondholder bailout is likely to be part of a restructuring that wipes out equity holders
$2B in NOLs- you need to profit to take advantage and company’s liabilities are greater than $2B
Billions in non-core assets to sell: What are these magical assets that are worth billions, not core to the business and losing money right now? The patents again?
Slow global digital expansion to minimize cash burn: Kodak missed digital. Period. Expansion isn’t happening. What would it mean to slow it?

This company has a bloated legacy cost structure it can’t get out from other. Like other legacy manufacturing industries(auto, steel, etc.), it will require restructuring in bankruptcy to rationalize and create a sustainable business.

Disclosure: The author has no position in any stock mentioned

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Map And Initial Analysis Of 79 Sears Closings Announced Today

by: Inelegant Investor - December 29th, 2011   2 Comments

Earlier this week, Holdings(SHLD) announced plans to shutter 100-120 stores. Today, the company released a pdf listing 79 stores to be closed, with more to be announced. I’ve converted this to a spreadsheet and mapped them

View Sears Holdings 12/29/2011 Closings in a full screen map

Of the stores closing 38 are Kmarts, and 14 are Sears Essentials/Grands, a failed concept which involved throwing a Sears sign on a former and hoping. This represents almost 30% of the remaining stores of this concept.  The closings announced seem to be concentrated in the southeast.  I haven’t had a chance yet to determine which stores are mall-based vs. freestanding, or to investigate real estate ownership; if you have any information or analysis to add, please share it here.

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KKR’s Representatives On Kodak’s Board Resign As Bankruptcy Looms

by: Inelegant Investor - December 27th, 2011   1 Comment

A little over two years ago, on September 29, 2009, Kolhberg, Kravis Roberts purchased $300 million in Senior Secured Notes from Eastman Kodak(EK) and was granted 40 million warrants at $5.50 per share.  As part of the investment,

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exercised its right to nominate two directors, Herald Chen and Adam Clammer.  Today, announced that Mr. Chen and Mr. Clammer had resigned.  In keeping with its exemplary corporate governance, the company released no information as to the cause of their departure. It would be safe to say, however, that KKR now feels that its interests have diverged from those of Kodak shareholders.  Perhaps it is a sign that a filing is imminent.

When we wrote about Kodak’s death rattles last week and wondered why the stock had popped(a gain which has now evaporated), we received some anonymous comments saying that we were foolish and knew nothing. This may well be so, but we’d like to think we’re educable. So if we’re missing something, if Kodak is really the next great stock, if it’s time for the return of the , make your case.  We’re happy to give equal time. We’ll even throw it up as a post if it’s well written and courteous. But in the meantime, we have to reiterate- this dead cat ain’t gonna bounce.

Disclosure: Author has no position in any stock mentioned

 

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Softer And Softer Side Of Sears Holdings

by: Inelegant Investor - December 27th, 2011   2 Comments

It looks like has lost another round in his great experiment with retail. Neither of the two major brands that comprise Holdings(SHLD) were in good shape when he purchased them. He famously purchased in

English: Sears Essentials Store

, buying debt for pennies on the dollar and emerging from with a controlling stake(despite the small distraction of being kidnapped amid negotiations). We’d previously posted that Sears strategy of drift needed to end and about some signs we saw of a new strategy taking hold under new CEO Lou D’Ambrosio.  Today, Sears announced dismal holiday sales and the closing of 3% of its full-line stores.

Despite gimmicks like extended pre-Christmas hours, the company’s same-store sales were down 5.2%(4.4% at Kmart and 6% at Sears). Much of the decline came from sales of consumer electronics, which were weak in both chains. One bright spot was that Land’s End sales were up year over year.  The company now projects that Adjusted EBITDA for the 4th quarter, will be less than half of last year’s dismal $933 million.  Actual earnings will be far worse, driven by a non-cash charge of between $1.6 and $2.4 billion related to change in valuation allowance for deferred tax assets(you need to make money to use deferred tax assets), and impairment of goodwill.

Most significantly, the company will be closing 100-120 full line stores. The specific stores have not been announced, but the closings will generate $140 to $170 million in cash as inventory is sold, before any cash received from monetizing the underlying real estate. The company will reduce peak inventory on top of that by $300 million and reduce fixed costs by $100 to $200 million. In total the company expects that the actions will reduce peak borrowing next year by $300 to $350 million.

Mr.D’Ambrosio described a change in the company’s strategy  regarding marginally performing stores:

In addition to the specific store closures listed above, we will carefully evaluate store performance going forward and act opportunistically to recognize value from poor performing stores as circumstances allow.  While our past practice has been to keep marginally performing stores open while we worked to improve their performance, we no longer believe that to be the appropriate action in this environment.  We intend to accentuate our focus and resources to our better performing stores with the goal of converting their customer experience into a world-class integrated retail experience.

Hopefully, it’s not too little, too late for Sears, as Jeanine Poggi at TheStreet.com reports that suppliers will pull back on extending credit to the retailer.  Sears itself has finally become concerned with liquidity, as the company notes that no shares were repurchased this quarter, ending quarter after quarter of plowing cash flow into aggressive buybacks. Interestingly, or, perhaps ominously, the company did not comment on either its online business or early results of licensing its brands for sale at other retailers.

We hope that these closings mark the first step in an aggressive pruning of money-losing operations. If online, brand licensing, and franchises can continue to grow at higher margins, and hidden gems like home services can be more fully exploited, we think the company can still return meaningful profits for shareholders.  The company may want to pursue additional spinoffs(perhaps of Land’s End or ) following the Orchard Supply spinoff. In any event, as long as the company can control the liquidation of its assets over a long period of time, shareholders will benefit, but the company is indeed walking a fine line and may soon cross into the point of no return.

At the open this morning, Sears is trading down 19% to $37

Disclosure: The author owns shares in

 

 

 

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Eastman Kodak Divests Insignificant Division, Muddles Management Structure, Stock Jumps 20%

by: Inelegant Investor - December 23rd, 2011   6 Comments

Eastman (EK) was once synonymous with photography and imaging. Today, like the abandoned subwayin its home town of Rochester, it stands as a hulking relic testifying to the lost hopes and dreams of a bygone era.  Kodak’s

The logo from 1987 to 2006. "Evolution of...

moments are now but a series of shadowy images of past glory wafting away.  This afternoon, the company issued two press releases.  The first, announcing an agreement to sell Eastman Gelatine for an undisclosed amount, stated that it was

consistent with its previously announced intention to sell non-core assets to sharpen the Company’s focus on its digital growth initiatives and accelerate Kodak’s transformation to a digital company

It’s a good thing the visionaries at Kodak have recognized the future is digital and have decided to sharpen their digital focus and accelerate their transition to digital. If only it were 1995! The company sold a minor division with just 95 employees for an amount it chose not to disclose, nor did it disclose any details about the division’s revenue nor profitability. In short, this is an immaterial event that has little impact on Kodak’s fight to remain solvent.

The second announcement, which was quite brief, noted the election of , currently General Counsel, as President.  What about , the current President? No problem, he’s also President. No doubt Kodak noted how effective it has been for (RIMM) to have co-CEOs and decided to emulate that company’s stunning success.  CEO Antonio Perez noted that the move reflected the strategic importance of the company’s intellectual property.  Kodak has 3 towering legacies: a brand synonymous with photography, a wealth of patents covering imaging technologies, and a crippling pension obligation.  The company invented much of modern imaging yet was slow to transition to the new world and gave up leadership to others. The market holds out hope regarding the value of patents and today’s 20% jump after hours is clearly a reaction to Ms. Quatela’s appointment as President.  Even in this act, the company has proved tentative, keeping Mr. Faraci in place.  This lack of decisiveness and vision led to the company’s spiral downwards, and it may eliminate any chance the once-great company has of voiding .

Disclosure: The author holds no position in any stock mentioned

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Overloaded SEC Gets More To Do

by: Inelegant Investor - December 19th, 2011   2 Comments

The past few years, have shown, in incident after incident, that the is overloaded, understaffed, and unable to effectively carry out its mission to police the securities markets.  So , that august body which cannot agree on anything,

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agreed to give the SEC an additional mandate unrelated to its core mission: to ensure that public companies properly and accurately disclose whether any of their products contain raw materials produced in Congo or other war-torn Central African nations.  This regulation, “[b]uried deep in the 849 pages of last year’s Dodd-Frank financial-overhaul law ” certainly has a laudable goal, and it may be that the mere act of requiring disclosure will improve the situation. However, assigning enforcement to the SEC almost guarantees that all gains will come from industry’s self-compliance.  Jason Zweig writes in the Wall Street Journal that

Buddy Barnes, chief financial officer of RF Monolithics, a Dallas-based maker of wireless equipment, says “we shouldn’t be funding renegades who misuse their resources and abuse their people.” His company relies on all four minerals, although RFM doesn’t always know where they were mined.

Mr. Barnes estimates that it would cost RFM $1 million to conduct its own audit of the mineral suppliers used by its contract manufacturers. RFM, which has a minuscule stock-market value of $11 million, had net income of $228,000 in its latest fiscal year and $312,000 the year before.

“For us, it’s the difference between being profitable and not,” says Mr. Barnes, who is hoping that larger companies will set up a system of verifying “conflict-free” suppliers that firms like his could piggyback on.

Perhaps an effort by industry will be successful as it has been in the lumber industry, where most lumber sold in the is now produced sustainably. But it is unclear why the Congress chose this route over stopping the import of goods containing raw materials from those countries. What companies use the most of these metals and will have their costs most impacted by switching to alternative suppliers and ensuring compliance down their supply chain?

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Daily Journal Corporation: Munger’s Last Standalone

by: Inelegant Investor - December 19th, 2011   Add Comment

I first became interested in (DJCO) while reading ’s excellent Chralie biography, Damn Right.  I have owned it in the past though not currently.  It consists of a declining but still profitable niche

Charlie Munger

newspaper publisher, and with ’s recent acquisition of , is the only company managed solely by .  Beginning during the 2008 financial crisis, Munger began deploying the company’s excess cash into a small number of undisclosed stocks, with great success.  Munger will tease that he has invested in “three financial stocks” or “two foreign manufacturing companies”, but the identity of the companies is subject to mere speculation.  Rational Walk recently posted an excellent comprehensive write up of Daily Journal; as I can’t do a better job, I suggest you go and read it here.

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