Tuesday, May 29, 2007

Trimming MCZ holding

MCZ has had quite a run since I first posted the idea at $.72. Today I took some gains off the table and, though I still believe there may be some upside left here, the risk/reward is not as attractive as it was 2 months ago, justifying a smaller position sizing in my portfolio (from 10% to 4%). On a side note, it is clear that MCZ trading has been taken over by the momentum crowd, which is fickle and generally unpredictable. This crowd could easily take the stock much higher from here, but I do not want to bet on that, at that areas it outside my expertise and investing style. I continue to hold a position based on the valuation prospects, not the short term price movement.

Onto valuation: the halo licensing deal was a big win, and has the potential to add $.04+ of earnings next year alone. At $1.43 per share, the stock is trading for about 20x my estimates of FY07 earnings of $.07 a share. As for FY08, I have outlined four updated scenarios below, updated largely based on my expected impact from the Halo deal.
Worst Case Conservative Likely Aggressive
FY07 rev (est) $102.0 $102.0 $102.0 $102.0
Rev Growth 0% 5% 10% 20%
FY08 Rev $102.0 $107.1 $112.2 $122.4
Gross Margin 25% 27% 28% 29%
Gross Profit $25.5 $28.9 $31.4 $35.5
Operating Exp $20.0 $20.0 $20.0 $20.0
EBIT $5.5 $8.9 $11.4 $15.5
Interest exp net income ($0.5) ($0.5) ($0.5) ($0.5)
Income pre-tax $5.0 $8.4 $10.9 $15.0
Net Income $3.4 $5.7 $7.4 $10.2
EPS $0.07 $0.11 $0.15 $0.20
Probabilities 15% 35% 35% 15%

Price at 15 P/E $1.02 $1.72 $2.23 $3.06
Upside @ 1.43 -29% 20% 56% 114%
Probability Weighted -4% 7% 20% 17%

Probability Weighted upside 39%

The aggressive scenario would include events like the inair product being a solid hit, or mcz getting a GTA license, while the worst case scenario would have the opposite occur (as well a other unexpected issues). You could make an argument that the stock should be valued at more like 20 earnings, in which case the weighted upside would be about 85%. That said, I think MCZ is set up for a stellar FY08, but that the comps will be difficult to match in 2009 and thus deserves a lower valuation.

I am excited about the company's prospects for FY08, and will be looking to add to the position if the stock dips back down to around $1.10, which I think may be a possibility in q1 or q2, given what appears to be a somewhat weak pipeline for mcz in those quarters. I will likely post another update when q4 is announced, though I believe the big catalyst here over the next few months will be the halo release, and any announcement of GTA or other big license deals.


Andrew said...


I first read your post a few weeks ago on MCZ and I thought you were right. But I think you're an idiot if you're going to sell. I believe you have made a mistake.

There are two types of investing, ones that are short-term and long-term. From you're article you stated that you thought that this company has a bright future and such. This is a long-term type of investment, yet you are selling out after a short-term move. I think you had the analysis right, but your actions are wrong.

I missed the move in the stock, but I believe that management is doing a good job and going for higher margin products.

I made the mistake of buying a great long-term investment and selling after a 30% rise, only to see is go 6x.

However, that said, I believe your reporting is good. Keep it up.


Research Intensive Investing said...

Hi Andrew,

I appreciate the criticism, even if the tone is a bit harsh.

I may be trimming my position a bit early, as I readily concede. That said, after re-evaluating the risk/reward characteristics of the investment at the new price $1.42, and the huge run the stock had, I believed it prudent to take some money off the table. At that price, I think Madcatz is still attractive, but not attractive enough to be a 10% holding of mine, a concentration which I reserve for my ideas which I expect to appreciate the most (Eyelogic, for example, is a 13% holding of mine, and I have not sold a single share). After selling at $1.42, I put in a GTC limit order at $1.10 to buy more shares that would bring my position back up to about 8%.

Though am not a short term trader, I do constantly evaluate the risk/reward of different trades, and will often increase or decrease my position size as the risk/reward characteristics change. Hope this helps to clarify my position.


Research Intensive Investing said...

By the way, I like your site. Some interesting ideas on there. I will add it to my reading list.

Andrew said...

Sorry for being so harsh, I just see so many people make that same mistake, they forget what they are doing.

Great research on MCZ.