Monday, August 17, 2009

Game On

"Someone forgot to tell Lego there’s a financial crisis. Toy maker posts healthy gains for the first half of the year... a 23 percent increase in sales compared with the same period last year."

So reads today's Copenhagen Post Online.

Staying true to his momentum roots, Jim Cramer was on CNBC's Stop Trading today extolling the virtues of Lego. Timely, yes. But hardly a controversial position. Only the Grinch hates Lego.

Carrying the "I love Lego" argument one step further, Cramer said this news is a proof of a back to basics trend. Taking the argument one step too far, he says that video gaming is in trouble. So no more $300 consoles.

So Lincoln Logs and Tinker Toys will be all the rage this year?!?
Yeah right.

I agree with the back to basics theme. Americans are saving again, our government excluded. Benjamin Franklin would be proud of our new found commitment. And Jo-Ann Stores (JAS), a Lonely Value favorite, is proving that crafts and sewing are thriving in this troubled economy. In general, people are staying home more, eating out less, and hunkering down.

But video games fit into this stay-at-home scenario. We're not going back to reading by candlelight Abe Lincoln-style, are we?

Let me say that I am not a video game expert. Nobody over the age of 30 can credibly claim to be. For the current generation, however, gaming is as basic as breathing. My gaming friends aren't trading in their Playstations for Lego Power Miners. Having a 5 year old, I know a lot about Lego and the Power Miners collection is very cool. But the makers of Grand Theft Auto needn't worry.

I can't blame Cramer for trying to make a cohesive story out of two recent (and unrelated) trends - video game sales are weak, Lego sales are strong. So what? Is there some deep meaning here? I doubt it. Gaming has its own cycles that have nothing to do with the broader economy. Ignoring this, Cramer talked about $300 gaming consoles as if to draw a comparison to the cheaper (back to basics) Lego alternative. Huh?

Well, #1 it's NOT an alternative (who really chooses between a Lego set and a Wii?) and #2 it isn't cheaper. The Power Miners set I want runs $400. Admittedly, that includes the Titanium Command Rig for $99.99. It's for my son. Really. Honest. Hey, you get your own!

Anyway, Cramer leaves us with the impression that there is an investment angle to all of this. If there is, he's got the wrong trade. If gaming company valuations are any indication, recent negativity is baked into stock prices already.

I own Nintendo (NTDOY) $32.24, which is a pure play (hate that word) and Vivendi (VIVDY) $25.66, which plays video games vicariously through a majority stake in Activision Blizzard (ATVI).

Nintendo is down over 30% this year and sits at (or near) its 52 week low. Vivendi is down over 20% this year, despite a positve write-up in Barron's on August 3rd - Investor's Fail to Hear Vivendi's Strong Signals

Nintendo has been hurt by a strong yen, but it is a dominant player in its market. Cash flow is solid and debt is almost nonexistent. Nearly one third of Nintendo's $36 billion market value is sitting on the balance sheet in cash. The dividend yield is around 5%. In January, the company announced it would continue its current payout level despite current weakness thanks to boatloads of excess cash.

Nintendo is one of the most underresearched companies around. This plus the conventional wisdom of Jim Cramer and others have created a wonderful opportunity for those with a time horizon reaching beyond 4 o'clock EST.

Barron's does a nice job of explaining Vivendi so I won't get down in the weeds too much. Suffice it to say that Vivendi pays a 7+ percent dividend. Enough said!?! Just kidding. Vivendi has a number of publicly traded components that are easily valued. The largest is a majority stake in Activision Blizzard worth around $8 billion. That represents 25 percent of Vivendi's $32 billion market value. And ATVI isn't overvalued by my estimation.

In any case, adjust for the publicly traded parts of VIVDY and you'll find that the underlying operating business trades at a single-digit multiple to free cash flow.

So whether it's the full on gaming exposure of Nintendo or the diluted one of Vivendi, I'm taking the opposite of Cramer's trade. My Power Miner purchase will have to wait. I'm buying Nintendo and Vivendi.

6 comments:

  1. Once again, thank you for a well written article and a great stock idea. We are Nintendo fans and with the current valuation, I am happy to jump in.

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  2. Thank you for the kind words. Good luck with NTDOY! A 5% dividend while you wait should be very nice.

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  3. I enjoy your articles. Please keep them coming.

    If the best annual report prize goes to Forest Labs, then the best Q&A prize should go to
    Mr. Iwata, Nintendo president. The English transcripts are on Nintendo website and reading them I instantly became a fan of Mr. Iwata. At certain times during reading, i even wondered whether i was reading Mr. Iwata or was it Warrent Buffett.

    Understanding Lumpy earnings, managing for long time value, having the courage to take contrarian positions when needed, heeding to your customers but not paying too much attention to analysts and so-called experts ...

    I am totally fascinated by Mr. Iwata and i wish Mr. market keeps making mistakes by treating lumpy earnings as trends.

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  4. There is a Q&A video on the Nintendo website that also illustrates what an exceptional management the company has. They are dominant for a reason. Again, thank you VERY much for sharing your views. It also is great to get positive reinforcement after putting the work into these posts. Never sure if anyone is reading!

    Can you please post the web address to the transcripts you are talking about so others can go to them directly?

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  5. Here is the link to Q&A
    http://www.nintendo.co.jp/ir/en/library/events/index.html

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  6. With you on Nintendo. Have just been looking at it and bought a couple of months ago - but the whole sector seems cheap to me. It's as if it's seen as ex-growth. Am now contemplating a bet on Activision - World of Warcraft seems a better idea than SecondLife to me as a candidate for a truly interactive social network.

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