Andrew, if that means the financials are too conservative, let's hope
it stays that way. That list is a riot :-)
One thing that amazes me is the current market cap of $193 million.
Now strip away the debt from the cash reserves + the equity position
in Opticom and EIDOS would effectively have around $60 million in
cash. That alone is $3.5 per share cash. If we use the current cash
reserves without taking into the account the equity stake in Opticom
ASA or the bonds, that's $4 per share cash. But let's go with the
first approach since this is conservative EIDOS.
Subtract $3.5 from the current bid price as of the close and EIDOS is
trading at $7.80 effectively. Or subtract $60 mil. from the current
market cap: That is $133 million. This looks unsustainable on a
comparative valuation basis and exposes EIDOS to hostile bids. Look
at some of the take-overs in the industry which is consolidating:
ERTS paid $120 million in cash for a third-rate development studio
last week. And Hasbro paid $6 a share for debt saddled Microprose
less than three weeks ago. Unprofitable Microprose, by the way has
an EPS loss of -$5.74. Ouch. That is a P/E multiple of more than 130
at $6 a share. Absurd. Meanwhile, EIDOS is in the top 10% percentile
of its sector in the software industry (ranked 11 of 298 companies)
according to quote.yahoo.com compared MPRS's
265 and to Westwood what?
Would the giants in the sector want to have the Lara Croft/Tomb Raider
franchise and the shelf space accorded to EIDOS at retailers like
COMPUSA? The movie deal with Paramount alone gives the company high
forward visibility a year out from this Fall. I would hate to see
EIDOS acquired at $20 a share, which would STILL give it a P/E ratio
of 19, below the industry average of 22 and half that of Electronic
Arts. And we're not even taking into account FYQ1 which should send
trailing earnings higher by at least 30 cents even with a loss of 33
cents. It seems to me either way, the current stock price is highly
unsustainable as we enter September unless Cornwall announces that
the company is doing a $3 billion bond offering to acquire ERTS :-).
--Here is my take on what is happening in Japan, Russia, South
America. A lot of emerging market debt funds are feeling pain
from massive redemptions. These are dedicated regional funds that
invest in emerging market bonds. I see these problems as serious
but country specific. How much effect to these regions have on
US production? Not much really. Our biggest connection to them
in an economic sense is through trade. But trade accounts for
less than 11% of US GDP; the rest is domestic production and
services. Japan is even a smaller fraction of that 11 percent.
Probably under 2% and Russia is less than 1%. While Canada's
economy is cooling Mexico's remains robust. These are our two
biggest trading partners.
Let's look at interest rates here and bond yields. At 5.40% the
long bond is very supportive of the equity market. But the reason
why the yield on the bond is at a historic low is not because our
economy is cooling. It's mostly capital flight into Treasuries.
Certainly, the booming housing market and tight labor market hardly
suggest a slowdown. The manufacturing indexes may have come down a
bit but we are mostly a service economy now. Meanwhile, the collapse
in commodity prices which has hurt Russia & Venezuela has actually
helped keep US inflation in check. I would be worried about equities
if the Fed was in a tightening mode here. But the risk of that is
low right now. Is the equity market really over valued after its 10%
correction relative to bond yields under 5.70%? I don't think so.
I mean many small caps have seen 30-50% corrections. Take a look
at EIDOS. It's at the high end.
I think there is a lot of political uncertainty and certainly the
unstable emerging markets and Asia don't help. So while I don't
expect the market to make much headway the fundamentals here are
very strong in my opinion. I would not be surprised or mind to
see the Dow drop to 7,900. But I see the Dow trading in a range
7,900-8,900 for the most part until some of these noisy and some
real recede. Until then, competitive devaluations in Venezuela
make for good copy while the staid housing market does not.
In short, I'm neither a bear or a bull. I'm an agnostic. But knowing
that there has been little change in the fundamentals here I keep
hunting for value among stocks that I have researched about and have
corrected at least 30%; have low trailing and forward P/E's and are
profitable. Perhaps the market snap back at Friday's close was a bit
too soon. But I used the morning selloff to buy into companies that
I like. In addition to EIDOS, my second favored company right now is
PWRH (Powerhouse). I loathe slot machines but that is what they make.
Insider buying; share buyback; small float and strong forward EPS
early next year.
PS. PWRH makes me think whether EIDOS should do a 10% share buyack.
Bleeker |
