MCZ Q3 2008 Results

By: ispeculatornew
Date posted: 02.20.2008 (10:44 pm) | Write a Comment  (2 Comments)

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MCZ – Mad Catz Interactive (American Stock Exchange) – (Closing Price – $0.82)

Mad Catz announced its fiscal third quarter 2008 results after the close yesterday and reported decent results. However, the stock sold off around 19% today because the company didn’t report an improvement in EPS and investors in the current market are extremely skittish and impatient.

Mad Catz came in with revenue of 34.27 million and earnings per share of 0.06. Revenue declined 6% year over year and EPS declined by a penny. The CEO blamed the shortfall in revenue on the strategy of eliminating less profitable product placements and focusing on higher margin products. While this strategy resulted in a higher gross profit margin, it didn’t translate into improved EPS. This is one reason investors decided to jump ship today.

I don’t think the focus to eliminate less profitable products was the only reason to blame for the decline in sales year over year. Consumers worried about a potential recession reigned in their spending this holiday season. This also factored into the sales shortfall. In spite of the weariness of consumers I still figured Mad Catz would post an increase in profits. However, Mad Catz reported big increases in sales/marketing expenses and G&A expenses. These unexpected increases resulted in the decrease in EPS year over year.

Even though Mad Catz didn’t report improved results, the stock price of Mad Catz wasn’t overpriced going into earnings. The company had sold off considerably since it high of 1.65 last year and had been drifting down for a few months. Mad Catz did get a sizable pre-earnings run and that’s another reason the stock sold off so much today. The speculators who bought in right before earnings decided to bail at a loss today when the results didn’t improve over last year.

So is the sharp decline in Mad Catz’s share price both today and over the last few months merited? I don’t think so. The PE ratio, which is one way to measure Mad Catz’s valuation, is selling at a discount to Mad Catz’s competitors and Mad Catz own historic PE. Logitech, one of Mad Catz’s competitors, is currently trading at a multiple of 22 according to Yahoo Finance. If Mad Catz was trading at the same PE ratio it would have a share price of $1.98. Also, when Mad Catz made its high of $1.65 last year it had a multiple of 28. Mad Catz is currently trading at a third of that valuation (Mad Catz has a PE of 9 at today’s closing price). This reflects how much small caps have fallen out of favor in the current market.

Due to the discounted valuation and the potential for positive catalysts and improved financial results in the coming year I think it would be a mistake to sell Mad Catz at the current price. The next generation console transition cycle is still underway and consumers are about to get some spare income in the form of tax rebate checks (this will boost retailers). Also, I think the transition to digital television in 2009 will have a halo effect on other consumer electronics next holiday season. As consumers pick up their new HD TVs I think they will also splurge on other electronic gadgets such as video games. This in my opinion will make next holiday season more robust. I also think the Mad Catz license to produce peripherals for the game Rock Band should not be overlooked. Rock Band was the fourth best selling game during January.

I don’t think the share price of Mad Catz will see huge improvement short term (the next few months) but I think the share price could see significant improvement over the coming year. I don’t see any reason to sell Mad Catz and I would continue to hold your shares. If you are looking for stocks that could see a more short term gain you should check out two of my other stock picks: SILC and SWIR.

Disclaimer: I have no position in any of the stocks mentioned.

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2 Comments

  1. Comment by Jesse — February 21, 2008 @ 11:11 pm

    You are right about MCZ. The price is a steal. I have been holding this stock when it was .40 cents. The company has grown into positive numbers throughout the two years and it has been buying companies that benefit growth. Yes, it looks like average people investors not large investment companies are selling shares. The average investor sometimes gets scared of false information or just panic. Call the company and do some research. They are happy to answer questions and you can even go to the Corona California Office where they ship in the Western part of the United States. The only reason I know this is my brother lives in Corona and the MCZ business is near the I-15 highway. I am here for the long run. Good Luck.

  2. Comment by Ed — February 22, 2008 @ 2:02 am

    Ummm…First off let’s talk about the the “sell off” after earnings. The open was a full 10 cents lower than the previous day close. hmmm… This accounted for 10% of the “sell off’ the other 9% can be attributed to stop loss limit orders being taken out. Also the 1.65 high lasted for all of 30 seconds. I looked in awe the day it hit 1.65 for those glorious 30 seconds as it fell back down to the 1.35 that it had been trading at for days. MCZ is a great opportunity with limited exposure but the the sins of the past are coming home to roost.

    disclosure: I hold a sizable position in MCZ common shares. I am an avid gamer and senior co-founder of partnerd media grp. inc. which wholly owns waveto.com, socialoceans.com, meetawhile.com, jobroar.com, studentbucket.com, and pophilarity.com
    “We Have fun, because fun
    is all we have”

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