By Matt Bacon

July 31st, 2020

Note: Carmichael Hill does not maintain a position in Eastman Kodak (KODK)

On Tuesday this week, the Federal Government announced a $765m loan to Eastman Kodak (KODK) to start producing pharmaceutical drug ingredients under the Defense Production Act. The loan is notable not just for its size, which itself is more than 650% of Kodak’s 2019 net earnings, but also for its repayment period – a full 50 years. The White House has said they are reviewing 30 other companies for additional deals under the Act.

Kodak has soared on the news. Since exiting bankruptcy in 2012, the stock has largely traded within a range of around $2-$4/share. The stock jumped just over 200% on Tuesday following the announcement. It continued its meteoric ascent on Wednesday adding close to another 320% and hitting a fresh all-time high of $60/share. Trading was halted in the stock 20 times on Wednesday due to volatility. Investor appetite, however, was not satiated. Figures provided from Bianco Research show 9,289 Robin Hood accounts holding KODK on Tuesday. By end of day Wednesday this had risen tenfold to 95,608.

Until this week, Kodak was not a stock that saw shares trade hands frequently. Volume was relatively low. A rush into the stock like we saw this week is more than enough to drive the price up to epic levels. It looks to us to be a case of fast money chasing after returns. We saw a similar event last month when a record number of worthless shares of the bankrupt Hertz company traded hands on the Robin Hood platform. Kodak is trading at close to $21/share at the time of this writing, or nearly 1/3 of the high it set just two days earlier.

Moreover, Kodak hasn’t produced any pharmaceuticals since 1994 when it owned drug company Sterling Winthrop. Even then, Winthrop produced over the counter medicines such as aspirin. Kodak has never manufactured the more complicated prescription medications that carry higher margins, nor will they under terms of the deal. Kodak will manufacture only the basal ingredients needed for generic medications, a fact that long-term investors must view with a least some disappointment.

The announcement is just one in what we believe will be many that follow. COVID has laid bare the risks in outsourcing critical components to essential goods overseas, such as medicine. For national security and the uninterrupted continuity of the American way of life, some supply chains will have to come home. The White House and relevant agencies are still determining exactly what components and which supply chains will need to domicile stateside. Trying to determine the winners at this stage would be prophetic.

The knock-on effect of moving production to the US will be higher prices for consumers. This begs the question of how much higher and whether Americans will accept it? Unraveling the answer is complicated. Absent tariffs, domestic subsidies, or some other protective measure, American producers of simple low-margin goods will still be at a disadvantage to foreign suppliers. It just costs more to manufacture here. Moreover, the domestic producers of sophisticated high-margin goods, such as advanced medicines and semiconductors, aren’t required to buy their inputs from expensive local suppliers. Even if Kodak met their production targets they may not have the ready-made market of buyers their hoping for.

More government intervention will likely be required if supply chains are to become more resilient and  production is to move back to US shores. To an extent, the success of Kodak and other yet-to-be-named domestic champions will depend on the government “getting it right”. We wish Kodak the best, but we’re not prepared to back that horse.


REGULATORY DISCLOSURE

Carmichael Hill & Associates, Inc. is a U.S. Securities and Exchange Commission Registered Investment Advisory firm. Registration does not imply that the SEC has endorsed or approved the qualifications of Carmichael Hill or its respective representatives to provide any advisory services. Advisor does not render or offer to render personalized investment advice or financial planning advice through this medium. Advice can only be given after:

  1. Delivery of a disclosure statement by advisor to client.
  2. Execution of our Investment Advisory Agreement between the client and the advisor.
  3. Initial payment of the planning fee or investment advisory fee by the client to the advisor.
  4. Advisor will not solicit or accept business in any state in which she or he is not properly registered or otherwise qualified to conduct business by virtue of a state “de minimis” exemption.
DISCLAIMERS

The information in this web site is based on data gathered from what the Advisor believes are reliable sources. It is not guaranteed as to accuracy, and does not purport to be complete and is not intended as the primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. The identification of specific funds and model portfolios is being made on the assumption that the investor would participate in that investment or portfolio on a long-term basis and only after consulting with their investment advisor to determine their needs and tolerance for risk. With respect to any such identification, there can be no assurance that the fund or model portfolio will in fact perform in the manner suggested.

The results do not represent actual trading due to the timing of the clients’ trades and their trading costs. They may also not reflect the impact that material economic and market factors might have had on the advisor’s decision making if the advisor were managing the clients’ money. Investment and portfolio results may be different than the results the advisor’s discretionary clients achieve due to the timing of trades and the market conditions.

All references that might be made to an investment or portfolio’s performance are based on historical data and one should not assume that this performance will continue in the future.

LINKS DISCLAIMER

At certain places on this Carmichael Hill & Associates, Inc. Internet site, live ‘‘links’ to other Internet addresses can be accessed. Such external Internet addresses contain information created, published, maintained, or otherwise posted by institutions or organizations independent of Carmichael Hill & Associates, Inc. CHA does not certify, endorse or control these external Internet addresses and does not guarantee or assume responsibility for the accuracy completeness, efficacy, timeliness, or correct sequencing of information located at such addresses. Use of any information obtained from such addresses is voluntary.