Thursday, October 30, 1997

Radica Games
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Phone: 702-348-2290
Price (10/29/97): $13 1/16

HOW DID IT DOUBLE?

Investors in Radica Games may be able to put up a Gone Fishin' sign after retiring on the returns they've reeled in from the company's stock. Due in part to the popularity of the game Bass Fishin', Radica's stock has exploded.

Radica games traded as high as $11 a share after its 1994 initial public offering. At that time the company's principal product was hand-held gambling games. Market saturation and a tremendous buildup in inventories spelled trouble and the company's stock plunged to near $1 a share in 1996.

In 1996 the company began to clean up its act. Plants were closed, inventory was cleared out, and a significant OEM deal was inked. On top of that, the company branched out of the gambling game business. The Bass Fishin' game is one of the hottest toys on the market today. Sub Assault and Tank Assault are also hot, hot, hot.

The turnaround has come right to the bottom line. After losing $0.95 per share in 1995, the company earned $0.07 in fiscal year 1996. Through the first three quarters of the current fiscal year the company has reported $0.57 per share.

BUSINESS DESCRIPTION

Radica Games is a designer and manufacturer of hand-held electronic games. The company is headquartered in Hong Kong. Along with the aforementioned Bass Fishin', Sub Assault, and Tank Assault games, the company also makes a Yahtzee game and non-gambling casino games.

The company has an agreement with Hasbro to make its electronic games as well.

FINANCIAL FACTS

Income Statement
12-month sales: $70 million
12-month income: $16.2 million
12-month EPS: $0.79
Profit Margin: 23.1%
Market Cap: $271.5 million

Balance Sheet
Cash: $22.2 million
Current Assets: $44.9 million
Current Liabilities: $13.8 million
Long-term Debt: N/A

Ratios
Price-to-earnings: 16.5
Price-to-sales: 3.9

HOW COULD YOU HAVE FOUND THIS DOUBLE?

Other than on the Motley Fool and Silicon Investor message boards there was little information available on the stock. The Silicon Investor message thread started with a post pointing out the turnaround at a time when the stock sold below book value. An Investor's Business Daily article in early September also could have been a tip off. The New America column in IBD is a good source for undiscovered stocks. However, by the time that article appeared the stock was already 900% off of its lows!

The other way to have discovered the stock was to have paid attention at the toy store. Bass Fishin' and Tank Assault have been flying off of the shelves and are in short supply. An investor aware of kids' toy appetites might have stumbled onto this stock.

WHERE TO FROM HERE?

In spite of the impressive performance of this stock, no analysts are following the company. Investors are left to their own devices.

When I look at traditional measures of value, the picture is mixed. A P/E of 16.5 with earnings growing at a prodigious clip seems pretty inexpensive. The next quarter's comparisons are going to be a little bit tougher as the company reported $0.21 in the 1996 fourth quarter. Still, earnings growth should exceed the current multiple for the foreseeable future.

The company's return on equity is a whopping 50% and return on assets is 37%. Both of these numbers are very impressive.

The stock is selling at 9 times book value. Therefore, the stock not a bargain on a hard assets basis, but growth stocks don't trade on the basis of bricks and mortar.

A price-to-sales ratio (PSR) of 3.9 seems to indicate a fairly valued stock given margins of 23%. In general terms, stocks with PSRs less than 1.5 are often considered to be "undervalued," but this is very dependent on profit margins. A higher profit margin will support a higher PSR.

All in all, Radica Games looks like a company that deserves attention from an investor looking for a stock in the toy industry. However, anyone buying shares in this company should be wary. The toy industry is a fickle one at best, and what is hot today may not be hot tomorrow.

- Mark Weaver, MD, [email protected]