Is Kodak Going Bankrupt Fast?

While Apple Inc. AAPL is having a blast after reporting earnings, pushing its stocks towards $400/share, a company that tried to ride on Apple's success by filing patent claims on Apple's product, is falling fast. The company, of course, is Eastman Kodak EK. Eastman Kodak, the company which brought us the term 'Kodak moment', is synonymous with the photographic film technology. Once a proud sponsor of the Olympics, its biggest headache used to be a Japanese company, FujiFilm, as they competed fiercely with each other over every major sponsorship event. Alas, they don't have to worry about each other anymore, as their glorious times had passed, with digital imaging technology replacing films decidedly. Nowadays, with many digital cameras selling at < $100 and every cell phone equipped with a camera, the people who still use film cameras are either hard-core professionals or really old people who do not bother to learn digital technology. Facing this sea change, Kodak is trying hard to cope with the disruption of its business by transforming itself to focus on digital printing and other digital products such as digital cameras and software. It also discovered that its vast portfolio of patents might allow it to anchor on the success of others, as it had sued and extracted hundreds of millions on royalty payments from LG and Samsung. However, its dispute with Apple and Research in Motion RIM had not gone as smooth, and hit a snag when the ITC (International Trade Commission) sent the dispute back to a judge who earlier ruled against Kodak, although Apple's countersuit against Kodak did not hold ground. While the suit against Apple is still on, the consensus is that it would be unlikely for Kodak to extract over a billion dollars from Apple and RIM as it originally hoped. Another shoe dropped when Bill Miller of Legg Mason disclosed that he had sold off his shares in Kodak. with $551.3 million loss, in April after holding it for almost a decade. These debacles had dropped Kodak's share from ~$3.5/share to ~$3/share in early July. However, in the last few days, Kodak's bond had behaved badly, with its 2013 bonds now yielding almost 16%. Its stocks had also dropped from $2.75/share to $2.31/share in the last 2 days. With earnings reporting due in next week, the recent price action of Kodak may indicate something bad to come. However, it's hard to imagine Kodak will just give up the fighting and rolls over when the CEO and directors recently purchased its stocks at ~3/share, even though it only ranged from tens to hundreds of thousands of dollars. Moreover, the bond is not due until 2013 and there are still time to work around the problems. For daring souls, this can be the opportunity to make good money if the price action was just due to some large funds unloading its holding like Legg Mason did. Kodak is definitely not in good shape, and there are no shortages of problems for its business. But to declare it dead (i.e. creditors taking over, leaving nothing for common share holders) at this point seems a little premature. Nonetheless, the price action might be telling something the general public does not know. Therefore, if investors were to go long on Kodak, we would suggest buying only call options, so the exposure will be limited, or writing puts, essentially betting on Kodak not rolling over in the short term. To do these, one can consider buying the 2011 Oct $3 call, betting that Kodak will be ok with its upcoming earnings report, and the Aug. decision on the patent lawsuit with Apple and RIM may produce some upside surprise. Another considering would be to write a 2012 Jan $1.5 put, getting oneself the premium of $0.27 on the put, betting that any bad news will not take the stock below $1.23/share, giving oneself a buffer of ~47% from its current price. However, make no mistakes these are risky endeavors, and one must prepare to accept any loss that may result from being wrong. Position: none