Don't Step in the Kodak Value Trap

Jim Cramer's comments on Kodak (EK) hit the nail on the head.¿ With the stock down so much, I hate to pile on, but this is a classic value trap.¿

Sure, the stock looks cheap. But the business is unlikely to turn around -- at least if management continues on its current course.¿ The core film franchise is in fairly rapid decline, and I don't think they will be successful in the new digital arena. So the stock will continue to fade, looking cheap the entire time.¿

The company is squeezing working capital to generate cash flow (third-quarter inventory declined to $435 million from $1.46 billion a year ago), but this can't continue much longer.¿ Operating cash flow from the core business continues to plunge, such that interest coverage is rapidly weakening.¿ In the third quarter the company had earnings from operations (adding back goodwill amortization) of $239 million, 4.6 times the $52 million of interest payments, so bankruptcy certainly isn't looming. But the trends are ominous, as earnings from operations in the same quarter a year ago covered a far healthier 14.5 times.

Grim Picture Kodak's debt on the rise

Source: Kodak financials.

The once-pristine balance sheet has deteriorated markedly, underscoring the craziness of paying such a big dividend -- recently increased and now paying more than 6.1%, based on the latest stock price today.¿ Dividend payments are now about $128 million per quarter, money the company can ill afford to send to shareholders.¿

The overall result of Kodak's declining business, combined with poor capital allocation, is rapidly rising debt levels. I have to echo Jim's conclusion: What a disaster.

Whitney Tilson is managing partner of Tilson Capital Partners LLC, a New York City-based money management firm. At time of publication, Tilson Capital Partners held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.