Longleaf Partners Small Cap: “Kodak (KODK) was the Largest Contributor for the Year”

Longleaf Partners Small-Cap Fund, an independent investment management firm, published its fourth quarter 2020  investor letter – a copy of which can be downloaded here. A return of 17.56% was recorded by the fund in the fourth quarter of 2020, below its Russell 2000 benchmark that delivered a 31.37% return in the same period. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.

Longleaf Partners Small-Cap Fund, in their Q4 2020 investor letter, mentioned Eastman Kodak Company (NYSE: KODK) and emphasized their views on the company. Eastman Kodak Company is a Rochester, New York-based photography company that currently has a $652.4 million market capitalization. Since the beginning of the year, KODK delivered a 2.09% return, impressively extending its 12-month gains to 388.82%. As of March 26, 2021, the stock closed at $8.31 per share.

Here is what Longleaf Partners Small-Cap Fund has to say about Eastman Kodak Company in their Q4 2020 investor letter:

“Eastman Kodak (79%, 11.21%; 3%, 0.37%), the global technology company focused on chemicals and print, was by far the largest contributor for the year. Despite the damage from COVID disruptions to its sales pipeline, the company maintained breakeven EBITDA (earnings before interest, tax, depreciation and amortization) and positive FCF in the last quarter with excellent cost control. Revenues improved sequentially with a gradual rebound. CEO Jim Continenza has done incredible work this year to improve the product offerings and return the business towards sustainable profitability. The stock price was extremely volatile this summer in the wake of July’s announcement of a potential $765 million US government loan to produce ingredients for a variety of generic drugs. While this government deal may have subsequently gone away, the physical assets, chemistry know-how, history of making ingredients and national need are still in place. Kodak’s Licensing business continues to quietly hum along, producing huge margins. As discussed in more detail in our 3Q letter here, we exited our small common stock position the day the deal was announced and then worked with the company to convert our convertible bonds to common shares over the course of the next several days, which we subsequently sold to take advantage of the price appreciation and reduce an outsized position. The conversion price on the bonds was $3.10, and the average realized exit price of those common shares was (roughly) $11. Today the company has very little net debt and untapped revolver capacity. The Fund’s remaining exposure is from preferred shares, which represented 10% of the portfolio as of year-end, and Kodak possesses the balance sheet strength to pay them off immediately.”

Our calculations show that Eastman Kodak Company (NYSE: KODK) does not belong in our list of the 30 Most Popular Stocks Among Hedge Funds. As of the end of the fourth quarter of 2020, Eastman Kodak Company was in 12 hedge fund portfolios, compared to 15 funds in the third quarter. KODK delivered a -4.70% return in the past 3 months.