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DailyTrends.com Small Cap Pick of the Week: MAD CATZ (MCZ)

Chris Lahiji
Chris Lahiji
Daily Trends.com
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This is one of my favorite undiscovered stock picks, and right now, it's ripe for the picking. What's amazing is that even close followers of the video game sector often forget of its existence.

Mad Catz controls more than a third of the video game accessories market (largest and growing), yes, accessories. It does not make or publish a single game, but it does manufacture (outsourced to contract factories in Southern China) things like memory cards, controllers, steering wheels, cables, adapters, and other miscellaneous equipment that enhances game play. They make products (over 160) for every single console imaginable (Nintendo Gamecube, Gameboy Advanced and Color, Nintendo 64, Sony PlayStation, PlayStation 2, Microsoft's XBOX, and ) that can be purchased at over 12,000 stores globally (practically all retailers who sell anything remotely electronic).

Approximately, 70% of sales account in the U.S., with areas such as Europe, South America, Mexico, Australia, New Zealand, the Middle East, and Japan currently being sold too. My theory at the start of the year was this: Gaming consoles inevitably go down in price (PlayStation 2, Gamecube, XBOX, etc.), serving as a catalyst for more people to purchase them (price drops from $200 to $149 this year). As the price drops, more and more people will have a need for accessories for the newly purchased systems. However, knowing that the average American consumer is spending less because of the gas burden, they will not buy the most expensive accessories on the market (products developed by first party vendors such as Sony, Microsoft, and Nintendo which are the most expensive) simply because no money is left over (after purchase of games and console).

That is why most people will have to rely on a third party vendor as a result, for their products are selling at a 50-60% discount at mass retailers such as Wal-Mart, Target, K-Mart, Best Buy, and Toys R Us. MCZ is recession proof in my mind for it serves the video game sector, and sells to impecunious consumers who spend all their money on games and have to resort to the company that sells the cheapest accessories. Over the past two years, its sales growth has been phenomenal as it continuously signs deals to sell in more stores, product innovation, as well as demographic expansion to video (demographic shift to 8-35 years of age from 8-17).

I spent time this week with CEO Darren Richardson to learn more about the future of Mad Catz.

We have met each other in person twice already this year, and I think he is a fantastic guy.

Lahiji (DailyTrends.com): Mr. Richardson, what has Mad Catz done in the past 12 months to position itself better for the future?

Richardson (Mad Catz):

1. Streamlined Operations

  • challenged costs in all aspects of the business
  • merged the Toronto corporate office into San Diego office
  • down-sized E3 presence
  • reduced the cost of GameShark.com hosting and marketing

2. Adding New Revenue Streams

  • developed products in adjacent categories e.g. iPod
  • looking to add additional "content" products e.g. GameShark acquisition
  • leverage product design, brand, low-cost manufacturing and distribution channel

Lahiji: It seems that your stock price has been very cyclical historically. Any reason for it?

Richardson:

  • The video game industry and Mad Catz business is cyclical :: over 40% of sales in the fiscal 3rd quarter
  • Viewed on a trailing 12-months basis Q1 F2005 is a high point in terms of EPS, Net Income and EBITDA since Mad Catz became a free-standing company in 2001

Lahiji: How important is it to see consoles drop in price and new consoles come out for Mad Catz's sales?

Richardson:

  • console price cuts lead to an influx of new price-sensitive consumers
  • many of Mad Catz products are value-priced
  • these price-sensitive consumers may be attracted to Mad Catz value over higher-priced first party
  • new consoles expand the market Mad Catz participates in

Lahiji: What are the new consoles coming out in the next 12-16 months?

Richardson:

  • Nintendo Dual Screen :: Nov 2004
  • Sony PSP :: Jan-Mar 2005
  • Microsoft Xenon (Xbox2) :: early 2006
  • Sony PlayStation3 :: 2006
  • Nintendo Revolution (GameCube2) :: 2006

Lahiji: You recently went into making accessories for the iPod. Are you going to make more accessories that don't pertain to video games?

Richardson:

  • The lines between video games and other forms of entertainment are becoming blurred :: PSP will play games, movies and music
  • Many iPod consumers are already Mad Catz consumers :: know our brand
  • iPod is sold through the same retail channels
  • Excellent opportunity to leverage our product design, brand, low-cost manufacturing and access to the distribution channel

Lahiji: You had a great acquisition with Game Shark. Are you looking to do more acquisitions at the moment?

Richardson:

  • Always willing to consider accretive acquisitions and licensing opportunities
  • GameShark was a great acquisition :: excellent brand, same retail channel
  • It's important to note that all Mad Catz bought was the brand
  • Contracted with outsourced developers and a publisher to launch 13 products in the first 12 months
  • GameShark is a content product :: the value is created by the software
  • Want to add additional content products

Lahiji: Finally, how did the name "Mad Catz" come about for the title of the company?

Richardson:

  • In the late 80's, the original founders of the business were having lunch with their wives in an outdoor market in Hong Kong
  • They were planning to start the business, talking about direction and possibilities, and making fun of each others relative strengths and weaknesses
  • At the same time two wild cats were chasing each other around the market and sparring
  • One of the wives said "that's you two - you're just like a pair of mad cats"
  • It became a working name for the project and eventually the name of the company :: Mad Catz

Lahiji: Amazing.

END OF INTERVIEW

I think Mad Catz (MCZ) is a well-managed company that will continue to grow off the video game sector's proliferation into the minds (of children and now adults) and homes of every household in the country, if not the world. Watch it become recognized over time.

The amazing thing is that in the next 12-16 months, MCZ will have a pipeline of business like no other. In my opinion, they are going to make a lot of money once the new consoles arrive, and generate consider revenue this Christmas time when consumers start purchasing old consoles at cheaper prices.

It did $100 million is sales last year, was profitable, and had around $66 million in assets.

At a $26 million dollar market cap, it's a bargain :)

-Chris Lahiji

Chris Lahiji will be available to take your questions until Thursday, October 14. Please use the form below to submit your questions.

 
 
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