Eastman Kodak (NYSE:KODK), a name long forgotten, is making major news headlines this year. The company was a pioneer in the advent of the film camera but fell off the bandwagon in the early 2000s. In a surprising turn of events this year, Congress enlisted the help of Kodak to manufacture medical supplies. Kodak stock soared by 1,000% following the announcement.
But things quickly took a turn for the worse when questions surrounding the stakeholders’ motives prior to the announcement surfaced. With biased maneuvering in play behind the deal, the loan is delayed for the foreseeable future.
Kodak stock is at rock-bottom once again as allegations continue to swirl. It would be best to hold off on this investment for now.
The Great Loan Debacle Crumbles Kodak Stock
Kodak’s call to manufacture medical supplies was poised to be a major comeback story. But while its stock did see a strong rally, it quickly fizzled out amid questionable motives. The pandemic’s toll on the healthcare system led to the need for more medical supplies.
In an effort to fast-track the production of medical supplies, Congress offered Kodak a $765 million loan. The deal was announced on July 29 and KODK stock rose from $2 to as high as $60 per share. An impressive rally by all accounts but the question on everyone’s mind was “why Kodak?”.
A deeper look into the intricacies of the deal raised a lot of red flags. Kodak stated that it had secured the deal by lobbying, spending as much as $870,000. However, a look into the books revealed that the company had spent no less than $5,000.
A second red flag revolved around the motives of Kodak’s executives. Senior management at the company was allegedly informed about the deal prior to the announcement, leading to potential insider trading.
Jim Continenza, CEO of Kodak, purchased 46,700 shares in the company nearly a month before the deal was officially announced. The company’s board members bought an additional 5,000 shares. While this is not suspicious in itself, Continenza then divested 29% of his shares almost immediately raising eyebrows and investor ire.
Ultimately, when the deal was announced, shares spiked and the CEO stood to gain nearly $135 million. When accusations surrounding the timing of the share purchase surfaced, the deal was inevitably delayed by Congress. Kodak stock declined almost immediately and is trending around $7.50 as of this writing.
So What’s In Store for Kodak?
Following a slew of allegations, the SEC immediately launched an investigation into the company. The funds for the manufacturing of medical supplies are on hold until the findings are released. This means the future of the company is basically hanging on a thread.
On a slightly brighter note, an internal probe confirmed that there was no wrongdoing but claimed that the “process was flawed.”
However, this presents a potential conflict of interest, given that the law firm conducting the investigation was hired by Kodak. But even if the allegations are proved false, the timing of the purchase of the shares by the board is still suspicious. It is also worth noting that multiple class-action lawsuits are currently pending against Kodak.
The company will not be in the clear until they receive the green light from public authorities. There is also the likelihood that if the investigation faces delays, the government could direct the $765 million loan to another company.
The Bottom Line On Kodak Stock
Kodak’s fall from grace was just as quick as its meteoric rise. The loan for medical supplies could have been a gamechanger for the company if it went through. Nonetheless, the allegations against the company make Kodak stock a risky bet right now.
Regardless of the loan status, an investment in Kodak stock is still a bad bet. In the second quarter of this year, the company reported a net loss of $5 million and a dip in revenue of $94 million. EBITDA is at a negative $7 million.
The loan would have served as a lifeboat for Kodak and made the company a corona-economy success story. But the swirling allegations are reason enough to stay away from Kodak stock for the foreseeable future. Until the investigation by the SEC shows no wrongdoing on the company’s part, it would be best to put your money elsewhere.
On the date of publication, Divya Premkumar did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Divya Premkumar has a finance degree from the University of Houston, Texas. She is a financial writer and analyst who has written stories on various financial topics from investing to personal finance. Divya has been writing for InvestorPlace since 2020.