Yesterday, I wrote a brief note wondering about the big rally in Eastman Kodak (EK) shares; on the day Monday EK rose 90 cents, or 11.3%, to $8.90, on little obvious news.
Well, it turns out that Rafferty Capital Markets analyst Mark Kaufman picked up coverage of the stock yesterday with a Buy rating and $15 stock target.
Kaufman writes that the $15 target is based on an EV/EBITDA multiple of 5.3x his 2010 EBITDA estimate of $805 million. He says the current lower price “is more indicative of [a] business facing liquidity issues,” and notes that the company has retired over $800 million of debt over the past two years, and entered 2010 with $2.024 billion in cash and $1.4 billion in debt, for a net cash position of $623 million.
Kaufman’s 2010 EBITDA estimate is just a bit above the First Call consensus at $786 million, but his 2011 estimate of $852 million is dramatically higher than the Street at $351.6 million, and his 2012 forecast of $900 million is likewise far above the Street at $504 million.
He contends that “investors may have overlooked” the large impact on Kodak results over the last two years from start-up costs in digital inkjet printers, where he says the company operating losses in inkjet printers reduced EBITDA by $500 million in 2008 and $375 million in 2009. Kaufman estimates that the company will lose over $250 million in the inkjet sector this year, but that losses in the segment will shrink further in 2011, with the segment becoming a positive contributor in 2012.
In his note, Kaufman points out that under Kodak’s recent licensing agreement with Samsung, EK will get $450 million in payments this year, providing a large chunk of this year’s EBITDA improvement over last year’s $547 million. The payment is not recurring; for Kaufman’s math to work, some of that will need to be replaced; he writes in the note that he thinks investors have “underestimated the potential for further digital imaging license revenue,” and asserts that technology licensing arrangements can provide “steady cash flow” of about $300 million over the next few years.
Judging by the big gap in his cash flow estimates and those on First Call, that’s a view not shared by the other Kodak analysts on the Street.
EK today has given back 45 cents, or 5.1%, to $8.45.
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