Shares of Eastman Kodak (EK: Charts, News, Offers) have been rallying for the past two trading sessions due to the International Trade Commission reopening the company’s patent infringement case against Apple (AAPL: Charts, News, Offers) and Research in Motion (RIMM: Charts, News, Offers), for alleged patent violations of its image previewing technology on iPhone and Blackberry handsets. If successful, the company could receive up to $1 billion from the two tech titans. This injection of cash could help the long-suffering former market leader, whose business model was nearly destroyed by the rapid rise of digital photography and cell phone based cameras. Shares of Kodak have plunged 36% in the first three months of 2011, and are still a shadow of its highs around $90 in 1997. The company has been long labeled as a dead company walking by analysts, and current CEO Antonio Perez has worked desperately to save the company from bankruptcy by downsizing its real estate footprint and focusing on printing and imaging devices. The ITC is expected to reach a decision regarding Apple and Research in Motion by May 23.
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Before investors get too excited about Kodak’s 8.6% rise on Friday and its subsequent 13% rise on Monday, it’s worth noting that the stock probably couldn’t have fallen much further – its current share price of $3.79 is barely above its $2.90 52-week low. The company is no longer a significant player in the camera industry it once dominated, and has been relegated to a second tier player in the imaging industry dominated by Hewlett Packard (HPQ: Charts, News, Offers). Even if Kodak receives the $1 billion in cash, what could it possibly use it to do? Apparently, Kodak has no other game plan except to sit on its patents and sue violators to receive licensing fees to generate capital. In 2009, the company sued South Korean cell phone makers LG and Samsung for the same image preview patent that it is currently pursuing Apple and Research in Motion for. The payout was a $964 million settlement for Kodak. In 2010, the company earned $630 million from licensing fees from other companies using Kodak patented technologies. If Kodak wins the settlement against Apple and Research in Motion, it would continue its hot streak of legal victories. Kodak owns over 1,000 patents which could be used as legal landmines against its better capitalized and more popular competitors. Research in Motion, which has already been struggling to keep shareholders, could be crippled by Kodak’s litigation, but Apple could easily take a half-billion loss without missing a step.
History has shown that while past litigation has boosted the stock – shares tripled in value to $8 after its Korean victories – the boost has been temporary. The rise to $8 was followed by another slide back to its multi-year lows. There is a clear problem with the company’s current patent-squatting strategy – it simply cannot be sustainable. It is merely Kodak treading water as it hopes companies step on their patents and get sued into additional licensing fees. However, if Kodak invests wisely in research and development to strike back at its currently crippled Japanese camera rivals, such as Sony (SNE: Charts, News, Offers), Fujifilm, Panasonic (PC: Charts, News, Offers) and Canon (CAJ: Charts, News, Offers), it could reestablish itself as a formidable camera manufacturer. Kodak has a strong brand name which has been synonymous with cameras for decades, and it wouldn’t be too late to stage a late game comeback. The company has been more interested in imaging products, such as printers and scanners, which has offset its lost film business, the former cash cow of the company with margins exceeding 50%.
Kodak is still a speculative bet, and more of a stock for short-term traders than long-term investors. If the IFC finds in Kodak’s favor, look for an upside of a few dollars before the stock resumes its inevitable descent. If the IFC rules against Kodak, then look for the stock to slip back to $3 level.
Other News About EK
Kodak Surges After Winning Latest Round in Patent Dispute
Kodak’s shares surge for the first time in months.
Left For Dead: Eastman KodakBuy, Sell or Hold?
Is there any hope left for Kodak?
Other Stocks in the News
Google Working On Its Own “Nexus” Tablet With LG
Will Google finally unleash its long-awaited tablet?
iPhone 5 Might Not Launch Until Later This Year… Or 2012?
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
Also remember that a patent infringement litigation can be a David-versus-Goliath confrontation. Defendants in patent infringement lawsuits are usually large corporations with unlimited resources, while plaintiffs in patent infringement lawsuits are often individuals or small businesses with very limited resources.