Cracking The Konami Code

| About: Konami Corporation (KNM)
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Nearly everyone who grew up with a Nintendo Entertainment System played as a commando in Konami's Contra, its flagship series. In fact, it's nearly impossible to be under the age of 50 and have gotten through life without playing one of Konami's products. That's because Konami has a product line that goes back nearly three decades, full of best-selling intellectual properties like the aforementioned Contra as well as other classic series like Castlevania (an adventure series where you fight vampires) and Metal Gear (a blockbuster spy thriller series).

Additionally, Konami has newer properties that cater to a younger generation, too, like Yu-gi-oh (which is a media phenomenon that spawned an anime cartoon, video games, and manga), Dance Dance Revolution (a dancing arcade and console game that's one of Konami's top sellers), and Silent Hill (a critically acclaimed horror series that was also licensed to film).

I began looking at the Konami ADR (NYSE:KNM) stock in an attempt to buck the conventional wisdom that Activision (NASDAQ:ATVI) was the only stock in the sector that had strong GAAP financials for value investors. What I found was a stock with a solid market cap (3.54b market cap) and relatively attractive financials for the sector according to the multiples - with a P/E of around 13, low for a tech company, a P/B of 1.44 - and a dividend for each of the last 10 years. I thought those multiples seemed high for the sector, so I decided to review the 20-F.

Diversification is Key

Konami's secret is that it's more than just video games. Konami operates in four segments - Konami Digital Entertainment, Konami Gaming (which is Las Vegas based), Pachinko and Konami Fitness. Unless otherwise specified, all the following figures are taken from Konami's 20-F.

Konami's video games division makes the least money of its divisions, and its revenue costs the most, which explains its multiples. Unlike in the states, many video game companies in Japan are conglomerates. So even though its core games division is down along with its peers, overall net income is ¥12.93b, only down slightly from the previous year's ¥13.31b.

Konami Digital Entertainment

Konami's video game division has profit margins in line with the sector. It has a strong pre-existing product line consisting of the classic intellectual property mentioned above and are hard at work on exciting new IP like "Neverdead" (an action title with a twist - you're already dead) and "Skullgirls" (a fighting game for Xbox Live/Playstation Network). Additionally, it also has a robust social games subdivision.

Unlike most of the video game publishers (excluding EA, which recently acquired PopCap) Konami has not only looked forward toward the casual/social games market but released hits like Dragon Collection on Gree, a leading Japanese Social Gaming Network. Konami is ahead of the curve with casual gaming, even if it hasn't brought it stateside yet, presumably over cross-cultural Freemium concerns or conversion problems.

The Konami Digital Entertainment division has a strong product line and is forward thinking.


Pachinko is a cross between pinball game and a slot machine. These machines are enormously popular in Japan (they're the only legal gambling machine). Sin sells, and when we look at the financials, this segment is doing great. It provides a nice counterpoint to Konami Gaming.

Konami Gaming

Konami Gaming is a Konami division based in Las Vegas, that manufactures slot machines, especially video slots. It is currently the 4th-ranking producer of video slots. This division contributes a substantial portion of the bottom line. Podium is Konami Gaming's #1 product. If you've been in a casino in the last five years, you've probably spent (or in my case, lost) a few dollars in one such video slot machine.

I'd be interested to see what actions Konami Gaming takes as a result of recent Federal clarifications of Wire Act (pdf) and the Nevada Gaming Commission's decision regarding online gaming, especially in view of peer International Game Technology's (NYSE:IGT) application to the Nevada Gaming Commision and recent Double Down acquisition. Konami Gaming's press relations person did not respond to messages regarding comment on this.

Konami Fitness

Konami fitness was a mild source of concern, though it is profitable. I had to contact a Japanese friend of mine to explain what it was. Apparently, Konami owns fitness/country clubs. They're like an upscale Bally's or a country club. They're extremely popular in Japan and there are over two hundred of them.

Obstacles Facing Konami

There are three significant obstacles Konami faces - poor public relations, stock price volatility, and problems specific to the Japanese market.

Poor Investor Relations

Investor relations and press relations are a persistent problem for Konami. It is difficult to get in contact with anyone to obtain basic further information on financial matters. That wouldn't be so bad if there were more data available - but that's not the case.

A brief look on the internet for financial news about Konami yields few results. The last major news item Google Finance has are press releases on February 8, and the February 10, regarding Yu-gi-oh playing cards. Only one is from a financial site. Both of these seem to stem from the same press release. Neither contain any meaningful financial information. The two prior to that are regarding the Digital Golf acquisition on January 20, and the WMS partnership from November 16.

The penultimate article is a story several months earlier. Yahoo Finance isn't much better. It briefly mentions a Joingo partnership from February 8. However, November 28, 201,1 is the last news article before that.

A quick inspection reveals one news feed originator that carries Konami information, namely Reuters. Konami needs to do more to get the brand out there on the street.

A key instance - Konami recently increased the dividend. Unless you read the 6-K filings, you wouldn't have noticed. Konami's relaxed approach to the financial media doesn't inspire confidence in investors. While Yu-gi-oh playing cards are part of the product line, why that gets two press releases and an increased dividend gets none boggles my mind.


While tech stocks can be volatile, KNM is more volatile over the past 52 weeks than most with a 52 week of $16.74 - $37.22. The volatility is noted in the 20-F as well. Much of this is likely attributable to the March 11, earthquake and the subsequent Nikkei crash.

Nintendo's 52 week is similar - $16.83 - $38.60. (NASDAQ however, was tamer at 2298.89 - 2930.68) so it does not appear atypical for a Japanese video game company. It is likely the fluctuation is primarily due either to the March earthquake and subsequent Nikkei drop or industry price fluctuations rather than a situation unique to Konami.

Problems Specific to the Nikkei and ADRs

Japanese exports are being decimated by the strong yen. Konami's peer Nintendo recently lowered its 4Q estimates based partially on this factor as well as the March earthquake. It does seem to have had an effect on Konami's Cash from Financing activities, which took a large hit in 2011.

The stock also faces the usual ADR problems most foreign stocks face regarding shareholder rights, liquidity, etc. Regarding the latter, the trading volume on Konami is low for a $3.5b market cap (frequently <10k traded/day when Nintendo is 100-200k). I think this is largely a result of the relaxed publicity.


This is a stock that may warrant a closer look for value investors in the tech sector. Konami is a diversified video game industry value stock, which makes it something of a rarity. If it can solve the public relations problems and get some institutional investors on board, it might have a robust future in store due to its strong product line in Konami Digital Entertainment and its Pachinko and Gaming divisions. However, unlike the Konami code - with its guarantee of video game victory, there are no surefire things on the Street.

Disclosure: I am long EA.