MCZ – Update

By: ispeculatornew
Date posted: 08.07.2007 (12:00 am) | Write a Comment  (0 Comments)

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MCZ – Mad Catz Interactive (American Stock Exchange) (Closing Price – $1.04)

The stock price of Madcatz has suffered an undeserved decline in the last few weeks, especially the last few days, so I am going to give and update of what I think caused this and where the stock price is headed.

There a quite a few factors that have contributed to MCZ’s decline.

First, there has been some selling by insiders of the company which can be a bearish sign. I think the timing of the insider selling, during Madcatz’s seasonally slower period, is more indicative of insiders taking some profit rather than a sign that the company’s share price has peaked. Madcatz’s strongest quarters are still to come so it would be foolish for insiders to sell now if they were trying to time the market, not to mention illegal.

Second, I think some investors are making unfair comparisons to 2005. If you look at a five year chart you will see a similar pattern in 2005 to now. However, there are major fundamental differences between 2005 and today. In 2005 the gaming industry was in a bit of a slump and Madcatz had a buildup of low margin inventory going into the holiday season. As Madcatz reduced its inventory at unfavorable prices, Madcatz’s margins and financial results took a hit. They only made a penny in Q3 06 and had gross margin of 15% (Q3 06 corresponded to the holiday season in 2005.)

Now the situation is completely different. The inventory buildup has been taken of and over the past year Madcatz has focused on higher margin products. As a result gross margins have significantly improved (29% last quarter) and results have improved (0.01 last quarter which is Madcatz’s slowest quarter). Madcatz could easily make ten to fifteen cents in Q3 08 (which corresponds to this holiday season) which is quite an improvement from the penny in Q3 06. Also, the video game industry is quite healthy and in the sweet spot of the new console transition.

A final factor to the very recent decline in Madcatz’s share price is a self serving article written last Friday. The author made negative comments about Madcatz that had no substance and then stated that he would add to his position on continued weakness in MCZ’s share price.

He first pointed out the recent insider selling and compared it to the insider selling in 2005. However, he didn’t mention or didn’t know what was really behind the movement in share price in 2005.

Second, he mentioned that a licensing deal with Grand Theft Auto didn’t materialize. However, this was never priced into the stock and was just one of his speculative hopes.

Third, he made a negative comment about the price of Madcatz’s InAir product. However, the InAir product won’t be a major contributor to MCZ’s financial results and who cares if he thinks the selling price is too high.

While I am probably giving this author too much credit the stock price of MCZ did gap down on Monday and his article probably contributed to it. I think the recent sell off is way overdone and now would be a good time to add some shares. I personally added to my position today. I also stand by my price target of two to three dollars in the coming year.

Disclosure: I currently own shares of MCZ.

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