Younger generations of investors will be very aware of the two names I am going to be discussing today. After reading this article, I hope that there is the possibility that some of our more seasoned colleagues might want to do some more research as well.
A Sleeping Giant?
Despite the fact that Nintendo (NTDOY.PK) is known throughout the world for its video games, the company has a history that extends into the late 19th century. The company has ADR listed shares, which are traded OTC in the United States. Founded in 1889 as a playing card business, the company eventually evolved into one of the dominant titans of the video game industry as it expanded into the business during the 1970s. Beginning with arcade games and later expanding into console gaming, Nintendo is responsible for the introduction of numerous characters, game systems and franchises that have become household names the world over.
Despite the runaway success enjoyed by the company after the release of the Nintendo Wii in 2006, the landscape of the video game business has been drastically altered due to the smartphone and tablet revolution. Nintendo, much to the chagrin of its shareholders, has been unwilling to embrace the trend by licensing its enormous library of games. Simply put, more and more video game consumers are seeking to utilize their tablets and phones to play video games, eschewing the purchase of consoles and related devices, reducing profit potential for console manufacturers. Nevertheless, Nintendo is still a dominant player in the industry and is very firmly entrenched.
A quick look at the key statistics of the company reveals the possibility of significant appreciation if the company can overcome its problems and enjoy success with its next console, the Wii-U. The Wii-U is currently only the eighth-generation console on the market, which could provide Nintendo with a return to profitability, by virtue of retaining a head start against its console competitors Sony (SNE) and Microsoft (MSFT).
At a current price of $12.64 per ADR share, an investor receives $10.94 in cash and $14.02 of assets in a company with no debt. Subtracting the cash indicates that $14 of assets can be purchased for less than $2. Despite the appearance of an enormous discount, there is a significant problem: The company is losing money and has slashed its dividend over the past several years. Further compounding these issues, the management of many Japanese companies often have philosophies that, while focused on very long-term horizons, can often be incongruous with shareholder interests.
Currently, in my mind, the logical floor for the price of Nintendo shares would be near $10.94, adjusted for yearly operating losses as I believe that paying any lower a price would value the business assets at nothing and the cash on hand at a discount as the company carries no debt. There is considerable potential for unlocking value as well, because Nintendo has the option of "tapping out" and licensing its video game library for distribution through Apple (AAPL), Microsoft or Google (GOOG) devices, a move which could potentially generate an enormous amount of revenue, especially for older games designed for handheld devices that are often uncomplicated and highly appealing to casual gamers. The latent value is surely there but is it unlockable? Other assets held by Nintendo are also very interesting and unexpected; one example which comes to mind is the ownership of the Seattle Mariners.
As the Japanese yen weakens, Nintendo could see increased profitability -- especially as its dramatic share price decline was correlated with the strengthening yen during 2008-2012. However, correlation absolutely does not prove causation and the intricacies of currency risk are outside of my area of expertise, so I will refrain from commenting or speculating further on this matter. I will say that I read the paper and check the USDJPY pair once every few days enough to realize that "Abenomics" is weakening the yen. If this trend can continue, it bodes well for some types of Japanese business, especially those that depend on exports.
Konami: You Are Getting More Than Video Games
Many younger investors have grown up with Konami (KNM), the company behind blockbuster titles including Metal Gear Solid and Castlevania. The company is also responsible for Dance Dance Revolution, an arcade game that I could never quite master due to my lack of rhythm, but one that has inspired younger generations to overcome an aversion to dancing.
What most investors, including myself, didn't know was the fact that the company is thoroughly diversified into numerous sectors aside from video games and counts real estate, health clubs, pachinko machines and even movie production as part of its portfolio of subsidiaries.
The company has ADR shares listed under the NYSE under the symbol KNM and has become attractive in my mind for several reasons. The company currently has a P/E ratio of 13.5, a healthy dividend yield and a price (as of 1/22/13) of $19.97 against a book value of $19.42 and cash per share of $5.64. The company also has $1.78 of cash for every $1 of debt and a price-to-sales ratio of .88.
I believe that Konami at this price offers the potential for a significant bargain, as it has a little over $25 of assets that an investor can purchase for around $19.50. Another appealing aspect about Konami is the willingness of the company to expand the distribution of its product through a variety of channels to more casual gamers, which, as discussed previously, is now a major venue for the consumption of video games. The company, in contrast to Nintendo, is also currently profitable.