NEW YORK (Reuters) - Eastman Kodak Co EK.N said on Tuesday it would buy back up to $1 billion of its stock, driving the photography company’s share price up nearly 17 percent from historical lows.
Kodak said it would fund part of the stock repurchase program, which is authorized through the end of 2009, from a $581 million tax refund also announced on Tuesday. The remainder is expected to come from available cash on hand.
The move sparked active buying of Kodak call options as traders bet on more share price gains. Until Tuesday’s rally, Kodak shares had tumbled 28 percent since it posted a wider-than-expected quarterly loss on May 1.
At those recent lows, the $1 billion plan would represent about 25 percent of Kodak’s outstanding shares.
Kodak has completed major elements of an expensive transformation into a smaller company that focuses on digital photography products and services, but has yet to post sustained profits and in the first quarter piled up wider losses in its consumer printing and digital camera units.
“Eastman Kodak is seeing a lot of call buying on this buyback news. Most traders are focusing on the July $15 calls which offer a cheap way to play the stock for a move higher,” said Frederic Ruffy, options strategist at Web information site WhatsTrading.com.
Kodak said the tax refund related to an audit of certain claims filed for tax years 1993-1998 and is comprised of a refund of past federal income taxes paid of $306 million and interest earned on the refund of $275 million.
The refund will boost the Rochester, New York-based company’s second-quarter profit by $574 million. Chief Executive Antonio Perez said the buyback was an appropriate use of Kodak’s cash.
“Our board’s decision to authorize this repurchase initiative underscores the rising confidence we have in Kodak’s product portfolio, in our current financial position, and in the execution of our strategy,” he said in a statement.
Kodak is counting on growth areas such as digital cameras, and commercial and inkjet printing to drive profits, even as its traditional film business continues to shrink.
But high commodities prices have forced it to lift prices for some products. In addition, Citigroup analyst Matthew Troy noted in a recent note that retail sales of digital cameras in the United States rose just 2 percent in April from the previous year, versus a rise of 9 percent in March.
“While (Kodak) has taken steps to streamline its digital capture supply chain, component sourcing, contract manufacturing and distribution system, demand weakness could have a dampening impact relative to Street expectations for more linear operating leverage and margin gains,” he said.
Cross Research analyst Shannon Cross said the news did not reflect any change in the photographic sector, so she was not adjusting her “sell” rating, or $14 price target.
“We think this should support the stock in the near term but that fundamentals remain challenging including: weak inkjet market, high commodities prices, declining film business and weak graphics business,” she said on Tuesday in a note to clients.
Shares of Kodak were up $1.94 at $14.28 in afternoon trade on the New York Stock Exchange after climbing earlier to $14.45. The shares hit a low of $12.20 on during Monday trading, its weakest level in recent memory.
Reporting by Franklin Paul, with additional reporting by Doris Frankel in Chicago, editing by Dave Zimmerman