Mad Catz Interactive (AMEX: MCZ; TSE: MCZ)

Rating: Buy

Target Price: 0.90 (230%)

Mad Catz Interactive's philosophy is to make your life all play and no
work, and they've done a fairly good job of that over the last decade.
Mad Catz is responsible for a plethora of video game accessories for
the Wii, Xbox, GameCube as well as for the home computer. Mad Catz has
put out accessories to games such as the NFL Madden series, Wii Fit
and RockBand just to name a few. Just last week Mad Catz and Nintendo
entered into an agreement for MCZ to supply an even greater amount of
accessories to Nintendo DS.
Despite a weaker economic environment and slowing video game sales
which were down in the 20 percentile based on recent reports, Mad Catz
was able to report record yearly revenue of 112.5 million dollars.
This was due in large part to MCZ's expansion beyond the United
States. Mad Catz can now count on 40% of their revenue coming from
outside the United States which is a clean 10% improvement from just
two years ago. One interesting thing to note however is that despite
the company deriving 2/5ths of their revenue outside the United
States, a select few customers make up a huge swath of their business,
so any delays or hiccups in the industry could vastly affect MCZ's
business. Gamestop currently is MCZ's largest customer, so closely
reading their quarterly reports and buying habits could clue you into
how Mad Catz should be doing.

Mad Catz is trading in the penny range yet again but that hasn't
stopped them from turning a profit in the past. If you look at the
past five years, outside of goodwill impairment charges, MCZ
consistently turns a profit of 4-7 cents per year. If you extrapolate
out their current 30 cent per share price, this company is trading at
4-8 times its price to earnings in its average year. Keep in mind of
course that 2007-2009 have been anything but average years, but as
long as MCZ stays consistent and video game sales don't plummett 50%
or more, you can almost count on continued profitability. I also feel
the need to add here that Mad Catz has implemented cost savings
throughout 2009 and 2010 which should net the company over 1 million
in savings which should alone translate into profitability.
Although Mad Catz maintains long-term debts of a shade over 27
million, they recently restructured this debt to a lower interest rate
over the next five years and renewed a three year credit facility with
Wachovia of 30 million dollars, so financing is also not a problem
despite tough economic times.

Although a very small company, Mad Catz management has at least one of
its top three members there since its founding in 1998. The other two
members have 4-5 years experience and are slowly adapting to the
industry. You know me, I always enjoy seeing double-digit tenures and
I think thats definitely one reason MCZ has performed so poorly over
the last year in terms of stock price.
Something to note is that the US Dollar can have a large impact on Mad
Catz's results. Since approximately 40% of their revenue is derived
from foreign countries, any currency translation where the dollar is
stronger can impact their profits by as much as 4-6% which is
something we saw in their most recent report. Theoretically here, what
we'd like to see is continued weakening of the US Dollar (which should
continue by the way) which should help to boost MCZ's profits.

What sort of problems might exist with owning Mad Catz Interactive?
Well, as I alluded to above, Mad Catz is largely dependent on a few
large customers. In fact, MCZ's top ten customers make up almost
2/3rds of all of their revenue. Any change in the buying habits of
these customers or even in their relationships with third party
developers could drastically affect their revenue. MCZ will always
tell you they have no long-term contracts with these companies but I
think that's more scare tactics than anything. Obviously the overall
health of the video game industry is critical to MCZ's success. You've
heard me say it before and I'll say it again, as long as this
purported economic recovery goes as planned, the video game sector
will be on fire within twelve months.

It's clear that Mad Catz is supplying the video game industry with
products for some very popular and well known games. Revenues were at
a record level in possibly the toughest year over the past three
decades. I predict that Mad Catz will return to profitability within
the next 3-6 months and turn a 2010 fiscal profit of 5-6 cents per
share. Although I don't see Mad Catz as a buyout candidate, I wouldn't
be surprised to see MCZ out there purchasing smaller rivals in 2010.
My bold prediction is that Mad Catz will see $1.15 per share before
Christmas 2010.

Disclosure: I have a position in MCZ