What I Like About MGT Capital

| About: MGT Capital (MGT)

How much would you pay to have a "virtual" colonoscopy over the real thing?

So what was your answer? $5, $10, $50, $100, $1000, $10,000, more?

Now write that number down on a sheet of paper beside you - because we are going to come back to it later.

Go on write it down - you are not allowed to read further till you do.

Now let me tell you why that number is important. Tuesday as I was trolling through the market looking for companies that had very little debt and had more cash then their market capitalization - I stumbled across MGT Capital Investments Inc (NYSEMKT:MGT).

On March 31st they had $33 million dollars cash, no debt, and a market capitalization of $11 million. So effectively, it looks like you can buy a $1 for 33 cents.


Dig a little deeper and it turns out they have two subsidaries:

Medicsight PLC and

Medicexchange Ltd

Medicexchange is an online community for radiologists. Without going into depth, I think we all understand how valuable a good vertical market community portal can be. I will let you check out medicexchange.com and decide its value for yourself.

Medicsight PLC is in fact a company listed on the London Stock Exchange under the symbol MDST. I understand MGT owns 55% of MDST and it has a market cap of GBP21 million.

At today's exchange rate, that is USD$35 million.

That calculates their 55% share to be worth USD$ 19 million. Remember MGT's market cap is only $11 million.

So if you totally disregard Medicexchange and just look to either the cash or market value of MGT's investment in Medicsight - there is a nice margin of safety.

That might be enough for you to decide to buy. But have a closer look at Medicsight - it is a company you may think of investing in directly, but I think it is cheaper to do so through MGT.

According to their website, Medicsight has software that helps detect cancer in markets like:

Colon cancer - The second most prevalent cancer in Western countries

•940,000 cases occur annually

•655,000 deaths annually

•if detected early, 90%of patients live at least ten years

Lung cancer - The most common and deadliest of all cancers

•1.3 million cases annually

•Lung cancer accounts for 17.8% of all global cancer deaths

•85% of patients live at least five years if detected early

How does the software work? It seems it is similar to CAD/CAM software in that it analyzes the images from CT scans to detect cancer early. On their website, you will see they have a lot of clinical data in support of their claims and their products have been approved for use in several major countries.

My basic understanding is the technology lets a radiologist detect cancer with a "virtual" colonoscopy rather then the real one. I presume this would, from the patient's point of view, be much more pleasant then a traditional colonoscopy. From the patient's, insurer's, and government's point of view - probably a lot more cost effective as well.

Now back to that number you wrote down. (You did write it down, didn't you?)

The amount you would pay for a "virtual" colonoscopy over the real thing.

Mutliply it by the 940,000 cases of colon cancer that occur annually.

How big was the number you came up with?

Now how many patients would be screened and not found to have cancer - twice as many, ten times as many - you decide?

Do the calculation again and you are getting an idea of the potential size of this one vertical.

Plus, they seem to have good distribution with a number of major manufacturers of radiology equipment including Toshiba (OTCPK:TOSBF).

Geographic markets include North America, Japan, EU, China, Canada, Korea, Australia and Brazil. (Medicsight’s Colon software has now been approved in Europe, Canada, Australia, China and Brazil, with US and Japanese approval applications in progress.)

Here is what Medicsight says about their product pipeline

Medicsight has realised the massive opportunity in the development of CT software solutions and potential for CAD. It will now plan to launch Liver and Lung Disease Management Software solutions in 2009.

So there you have it. Buy MGT at a 66% discount to the cash MGT had on its balance sheet at March 31st - that should protect the downside - and get what may become an integral part of screening for cancers like colon and lung as the upside.

Now it is not all roses, to me it seems it has taken them a lot longer than they anticipated to commercialize the technology. A technology company not delivering on time wouldn't be a first so you may be prepared to forgive them and have a punt as I was.

The other thing that bothered me was this ownership information from MSN Money:

Why do I not see reasonable levels of Mutual Fund ownership? Is MSN Money wrong? Do the mutual funds see a red flag?

With only 5% insider ownership, has management forgotten about creating shareholder value? Is that why the share price is so low? If there is only 5% insider ownership, then I guess it would not take a big investment for someone to focus managements mind more on shareholder value?

What are your thoughts?

Disclosure: Long MGT