DailyTrends.com Small Cap Pick of the Week: eGames (EGAM)
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Our last few picks have been stellar, and eGames is no exception by any means.
The stock is REALLY cheap, and that is no exaggeration. We will get into the financial details in a second.
First, let me tell you what it does, and you'll probably get a kick out of it.
eGames (EGAM) makes computer games for all ages. For the young, baby-boomers, and the retired alike, the "e" applies to "EVERYBODY."
Based out of Pennsylvania, the company makes non-violent and very "easy to use" games for the PC. Some of its titles, such as Speedy Eggbert and MahJongg Master typically sell for $15 or less. They are marketed under brand names, including eGames, Home Office Help, and RealAge.
In the United States, eGames are sold at the nation's largest chains, such as Wal-Mart, Target, Best Buy, and K-Mart, through wholesale distributor Atari.
Over the past 12 months, they have expanded their presence to serve office supply stores and warehouse clubs as well, such as Office Max and Sam's Club. eGames also sells online games through its web site, http://www.eGames.com
I spent some time this week with the Vice President of Sales & Marketing of eGames, Mr. Rich Siporin, to get some questions answered for the members.
Lahiji (DailyTrends.com): Mr. Siporin, please tell us about the corporate history of eGames from inception. Has it always been a seller of cheap games for computers?
Richard Siporin: Actually, our games are anything but cheap. We publish fun, simple, easy to play gaming software. Our PC games all have a significant price value relationship. This makes eGames a leading publisher within the value priced PC software arena. And yes, that has been our strategy for quite some time now.
Lahiji: Who are your largest customers? Which new customers have you signed within the last twelve months?
Richard Siporin: Our largest customers are the major national retail chains, most notably Wal-Mart, Target and Best Buy. We have gained a lot of retail momentum over the past 12 - 18 months having gained placement at a number of new retailers including Office Max, Office Depot, Circuit City, Sam's Club and BJs.
Lahiji: Do you think that you increase your distribution pipeline with adding retailers in Canada and overseas?
Richard Siporin: We do have distribution in Canada as well as a number of overseas markets. Retailers such as Wal-Mart, Staples, Radio Shack and Future Shop are the leading Canadian retailers and we have enjoyed distribution growth in the Canadian market. Our overseas business is a very profitable licensing model. The major countries we currently do business in include UK, Germany, Australia, Brazil and Japan.
Lahiji: How come management owns such a small percentage of the stock? It is, in my opinion, obscenely undervalued.
Richard Siporin: Management, directors, and employees have been granted approximately two and one-half million stock options. Many of the options are in the money and some are not. When executing stock options, tax consequences accrue that require outlays of cash in addition to the amount of cash required to execute the stock option. This is typically why insiders have not been buyers in the open market.
Lahiji: Have management ever done a "buyback?"
Richard Siporin: Yes.
Lahiji: Why has the stock (in your opinion) gone down so much in the summer months?
Richard Siporin: Being a small micro cap company means you are open to the slightest business swings. It could be as simple as one purchase order falling into one quarter from another. You never know why investors make the decisions they do. What I do know is, we are sticking to the same fundamental principles that have allowed us to grow and believe if we continue to do so, the market will eventually follow. We cannot control how the market reacts, we can control our strategy.
Lahiji: Are you looking to rely less on Atari (70% of sales) and be more diversified in generating profits?
Richard Siporin: The nature of our business currently calls for our major retailers to be distributed through a wholesaler. Our wholesaler happens to be Atari. We have enjoyed success with Atari. Having 70% of your business tied to a single entity is not all bad. The more business you have with a distributor, the more important you are to them. Then the more important you are to them, the greater your chance of gaining the support you need from retailers. In the end, our objective is to sell our products to customers through retailers. We make it clear to these retailers that we will ship them eGames products in the manner in which they prefer.
Lahiji: You guys say in your 10-K that the PC market is shrinking. Are you looking to add a new case of products to make up for the decline?
Richard Siporin: We are always looking for strategic fits to our business.
Lahiji: Do the proliferation of cell phone games affect your business negatively in anyway?
Richard Siporin: We don't believe so. PC games still remains a billion dollar business, so there is still room for growth. PC's are by far the most ubiquitous platform so we remain focused on serving those customers
Lahiji: Finally, what can members see eGames doing in the next 12-16 months? What is your company's game plan to keep shareholders happy?
Richard Siporin: As I stated earlier, we remain committed to our strategy of publishing fun, simple, easy to play PC games. We are fortunate in that our customers tell us what they enjoy. We take this information quite seriously and will continue our efforts to give our valued customers what they are telling us they want.
END OF INTERVIEW
Financially, the stock in my opinion is a dream come true.
In fiscal 2004, the company reported net sales having increased by $827,000, or 11%, to $8,038,000 for the year ended June 30, 2004, compared to $7,211,000 for the prior fiscal year.
Operating income increased 21% to $1,822,000 for the year ended June 30, 2004, compared to $1,507,000 for fiscal 2003. Net income was $1,740,000, or $0.16 per diluted share, for the year ended June 30, 2004, compared to $1,592,000, or $0.16 per diluted share, for the prior year.
That means it's currently trading at a P/E (Price/Earnings) of 4.3 with no debt and over $1.5 million in cash!
The average P/E for an S&P company is almost five times that!
True that the company is going to sell less to Wal-Mart as a result in declining market share for PC games, and true that the company depends on Atari for most of their sales.
However, I think it's already factored in the price of the stock.
I personally believe that the company will find ways of making up for that lost revenue through the distribution of games over the Internet and new product offerings in entertainment.
In my opinion, it's worth the risk. They have a near flawless balance sheet, and that tells me that management is very disciplined in the way they spend and save money.
They will be disciplined enough to find novel ways of making the business grow and prosper.
Chris Lahiji will be available to take your questions until Monday, October 25. Please use the form below to submit your questions.