Yu-Gi-Oh Starts Buying 4Kids Stock (KDE, SCHL)

4Kids Entertainment, Inc. (NYSE: KDE) must have gotten tired of seeing its stock hitting new near-term lows in its stock prices.  The entertainment company which has the US rights to Yu-Gi-Oh ™ and rights to TMNT ™, Cabbage Patch Kids ™, and more has approved a share buyback plan of up to 1 million shares of its common stock through December 31, 2008.  This only represents $11.5 million dollars or so today, but the market cap for the company is only $154 million.

Interestingly enough, this one just recently started coming through on certain value investing stock screens based upon its balance sheet and the stock recently hitting 52-week lows making the company’s market cap closer and closer to its tangible book value.

4Kids still has spotty earnings, so using a hard book value isn’t the greatest measurement out there.  That being said, as of its September 30 balance sheet it only has $23.6 million in total liabilities and its total assets were listed as $172.5 million.  Normally we’d back out the goodwill and other intangibles and look at this with having real assets of roughly $135 million, but because of the name kid franchises it has we actually think the goodwill and intangibles are possibly understated.

We were briefly evaluating this one as a candidate in recent days for our Special Situation Investing Newsletter, but the fairly low trading volume may keep this at bay.  24/7 Wall St. does believe that it has an under-leveraged balance sheet, although the spotty earnings and cash flows currently and expected ahead are the reasons for that.

• Scholastic Corp. (NASDAQ:SCHL) did a similar move in recent months where we called "Harry Potter an investor" after the company announced its own share repurchase program.  Its stock has since come back down, but it ran sharply after its buyback announcement.

For the right buyer this would offer some extreme value under the rightcircumstances.  But it is definitely not a given that the company’sstock will be the assured beneficiary.  4Kids stock is up over 4% today at $11.75 after the news, and its 52-week trading range is $11.18 to $20.31.  This did hit a new 52-week low this morning at $10.72 before recovering and this has a short interest of 815,000 shares as of the latest data.

Jon C. Ogg
December 4, 2007