Entertainment licensor 4Kids Entertainment
Put it all together, and this little purveyor of Japan-o-centric children's cartoons has had quite a rough time of it this year. It should come as no surprise, therefore, that the stock is nearly 40% off its 52-week high. But hold on a second. The GAAP results explain why Wall Street doesn't like the company, but they don't tell the entire story. Let's take a second look at 4Kids, this time, from a free cash flow perspective.
4Kids neglected to provide a cash flow statement along with its earnings announcement, making it just that much more difficult for investors to get this perspective. That's a shame, because when you look at the cash flow statement included in its 10-Q (already filed with the SEC), the company actually shows a lot of promise. Comparing the first-nine-months results of 2004 to those from 2003, 4Kids has generated $10.7 million in free cash flow year to date, for a 32% increase over last year's $8.1 million.
Given the seasonal nature of companies tied to the toy business, calculating a run rate based on that $10.7 million in free cash flow is almost guaranteed to understate the company's true cash profitability. But let's run it anyway, just to see a worst-case scenario: Assuming the company's fourth quarter were as bad as the first three quarters have been, 4Kids would still generate at least $14.3 million this year, giving it the very low enterprise value-to-free cash flow ratio of 10.2.
When you consider that Q4 will probably be a bit better than that, 4Kids actually looks intriguing. To this Fool's mind, the company already incorporates characteristics of two previously successful Motley Fool Stock Advisor picks: It has a light, IP-based business model resembling Marvel's
For more on 4Kids, and why it looked even cheaper a few months ago, read:
Fool contributor Rich Smith owns shares in Marvel but not in any other company mentioned in this article.