<SPECIAL FEATURE>
February 9, 1999

Stocks Fools Love

Midway Games Inc.
by Paul Larson (TMF Parlay)

Trading at 7 15/16 as of February 8, 1999

Unlike some of my other holiday picks in 1998, my love for Chrysler paid off handsomely last year, thanks to a buyout from German-based Daimler Benz. Can my Valentine for 1999 repeat the performance? I think it's entirely possible, with a company that Wall Street seems to anything but love at the moment -- Midway Games <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MWY)") else Response.Write("(NYSE: MWY)") end if %>.

Things are far from all roses at the arcade and home video game maker, yet that's one of the reasons I'm attracted to the shares. Recently there has been some loss of momentum in earnings growth that has many traders blitzing for the exits. The pessimism has gotten so bad that the company is now trading at less than 9x trailing earnings.

Part of the reason for the shares being placed on the clearance rack is that Midway guided down earnings estimates for the next 6 months or so. And the company indicated that revenues and profits are likely to be slightly below what they reported in the same period last year. For reference, Midway reported $0.43 in EPS for the first six calendar months of 1998. Looking at an anemic coming two quarters, I can see where some might see it prudent to jump ship. Not me. I think Wall Street is overreacting to the bad news and discounting this solid company too heavily.

Even with the hosed-down forward estimates, Midway is expected to earn $1.43 per share in fiscal 2000. That would put the shares at less than 7x that forward guess. If the company can meet those goals, I highly doubt the market will continue to assign a single-digit P/E multiple to the company. A measly 12x that forward number is nearly a double from today's levels.

Of course, estimates made by analysts are just that -- estimates. I wouldn't recommend buying a stock on forward guesstimates alone. There need to be more positive indications for the company. For Midway, there are plenty of signs that it is strong enough to get through this tough time.

Let's first look to the balance sheet. The company has roughly $0.75 per share in cash (slightly less than 10% of the current stock price) sitting in its coffers, and zero long-term debt. I like companies with lots of cash and no debt, since it expands the margin of error for equity investors. Not only can the company finance itself, but the cash may also attract a suitor or two.

Part of the way Midway has been deploying its excess cash is through share repurchases. Share repurchases, when done correctly, increase shareholder value nicely since future profits will be spread over fewer shares down the road. In addition, repurchases represent confidence in the company by the board of directors.

Speaking of confidence in the company, I've come to what I consider the strongest buy signal for Midway -- insider buying. The insider activity at Midway is both relatively large and broad enough to warrant significant attention. Neil Nicastro, the company's president, has put down more than $1.5 million of his personal cashola into the common stock over the last year. Four other company officers have also been buying, putting in nearly $400,000 of their own money in recent months. If that isn't enough, Viacom CEO Sumner Redstone, who already owned more than 4 million shares at the beginning of last year, has purchased more than a million shares on the open market over the past two quarters. These aren't token purchases, Fool.

As they say, insiders may sell stock for any reason (to buy a boat, a new house, etc.), but there is only one reason insiders buy stock. They expect to make money! It is clearly a strong vote of faith in the company when a company's officers, folks who generally have much more knowledge and information than the investing public, buy their company's stock. Additionally, many of these corporate officers already have large chunks of their net worth tied up in their employer's stock. Putting their own personal funds into their company is very strong evidence that the company's future is solid.

Near term, I'm not expecting much in the way of profits from Midway. Product delays and a weak market for arcade games have certainly dampened my expectations. Nevertheless, in the longer term I have reason to believe the company (and therefore the stock) will get back to racking up some high scores.

Midway Games Company Information:
Trades on the NYSE under symbol MWY
Web Site: www.midway.com

Company Address:
3401 N. California
Chicago, Illinois 60618

Other Related Links:
Current Quote
Chart
Message Board
Daily Trouble -- 6/26/98

Post a Message About a Stock You Love and You Could
Win Flowers From 1-800-FLOWERS.

A Stock to Love represents the opinion of one Fool and in no way should be taken as the opinion of either the Motley Fool, Inc., the company in question or representative of anyone or anything else other than that specific Fool's thoughts.