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Admittedly, we were not familiar with 4 Kids Entertainment (KDE) prior to attending The Value Investing Congress in Hollywood this past May. Thats where Lance Helfert and Atticus Lowe from West Coast Asset Management presented an interesting case, centered on the release of the company's Chaotic card game, which will also have an internet tie-in not unlike Webkinz. If you are not familiar with Webkinz, you probably don't have young children. Nothing more than stuffed animals, along with the ability to go to a website, play games, "buy" things for your stuffed animal, suffice it to say, it is quite the craze.

Crazes come and go, but Helfert and Finch believed this one -Chaotic- could be very big and very profitable. Two delayed release dates later, the few analysts that cover KDE are skeptical at best (not that the analysts are always right).

We've owned companies before that were at the mercy of the whims and fancies of young consumers. Topps (TOPP) is an excellent example, albeit one that was more established, with more recognizable brands and products than KDE.

4KIDS is a tiny company, a microcap with a market cap of just $198 million. Sales, and earnings have been falling, from $99.2 and $11.8 million in 2004 to $71.8 and a loss of $1.7 million in 2006. Revenues are generated from licensing- 44% of 2006 revenue (Teenage Mutant Ninja Turtles, Cabbage Patch Kids), broadcast media and advertising- 23% of revenue, (much of it from the Fox Saturday Morning 8-12 TV slot) and TV and film production and distribution- 33% of revenue.

Chaos or Chaotic?

Sure, we were impressed by all the promise of the Chaotic brand, but we also recognize that the risk is growing, day by day, delay by delay. The main question from an operational standpoint is: Can management deliver Chaotic? The next question is, of course, if they do finally deliver, will Chaotic resonate with it's audience? Interestingly enough, we are more comfortable with the second question than the first: If management can deliver the product/website, from what we know, we believe it has a good chance of being successful.

The Safety Net (Net)

Delays aside, what really got our attention was the relatively large hoard of cash on KDE's balance sheet, and fact that the company currently trades at just 1.62 times net current asset value.

We are big fans of cash on the books, especially when it is unencumbered by debt, and not likely to be burned through in a hurry. Cash in that situation can create a safety net. While cash alone is rarely a sufficient reason to put a name in your portfolio, when combined with a potential catalyst -Chaotic, in KDE's case- it can be quite the deal sweetener.

The Numbers

Cash & ST investments: $111.6 million
Current Assets: $146.2
Current Liabilities: $24.7
Long Term Liabilities: $.7
Net Current Asset Value: $120.8
Market Cap: $195.1
Market Cap/NCAV: 1.62
Cash and ST Investments/share: $8.47Current Price: $14.82
LT Investments: $3 million

Conclusion

Management has lost some credibility due to the delays in the release of Chaotic and this seems to be reflected in the current price. Theoretically, buyers of KDE at the current price of $14.82 receive in return $8.47 in cash, while paying $6.35 for current operations, along with a call option on Chaotic. Granted, the Chaotic rollout will consume an estimated $15-20 million of the company's cash. Still, this is a compelling story to keep an eye on.

KDE 1-yr chart

KDE

Disclosure: The author does not have a position in 4Kids Entertainment. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Source: Can 4Kids Entertainment Management Deliver Chaotic?