It's been more than six months since I first took a look at entertainment licensor 4Kids Entertainment
If you've read our two earlierarticles on 4Kids, then you already know that it's the company that brought Pokemon and Yu-Gi-Oh! to the United States. It's also the marketer behind Teenage Mutant Ninja Turtles and the revival of the Cabbage Patch line. The continuing success of those properties explains how 4Kids has managed to generate more than $20 million in free cash flow over the past 12 months, and it also explains, in part, why the stock price has fared so well in the recent months.
Yesterday's 13% stock-price jump, however, came from another source: 4Kids' acquisition of the rights to yet another potential moneymaker -- an animated series based on Hasbro's
G.I. Joe prospects aside, however, there wasn't a whole lot to cheer about in 4Kids' earnings news, which also came out yesterday. Revenues and profits per diluted share for the quarter held steady, but overall, the fiscal 2004 tallies were pretty anemic. Profits declined 15% vs. 2003's numbers, and free cash flow fell by 12%. Given those disappointments, the mere $1.2 million rise in revenues seems a less-than-adequate basis for all the rejoicing.
In this Fool's view, there's only one explanation for why a double-digit decline in both profits and free cash flow would translate into a double-digit increase in market cap. Quite simply, 4Kids was ridiculously cheap. And with an underpriced stock, even the release of an objectively bad earnings report can yield outsized profits if the company performs just a little less badly than Wall Street had expected.
Want to find your own deep-value investments? Read all about the screen that first showed me 4Kids, in "Screening for Friends."