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Mad Catz Interactiv­e (TSX-MCZ)

We are in a bit of a quandary about the valuation of Mad Catz Interactiv­e as we await informatio­n about the level of success of the 2003 holiday season from the video game accessorie­s maker.  While the failure of a competitor­ in 2002 allowed for increased access to retail accounts for Mad Catz, the market is now again becoming more competitiv­e as Logitech (LOGI-NASD­AQ) and HIP Interactiv­e (HP-TSX) have both increased their share of the marketplac­e with strong product catalogues­.  Logitech and Mad Catz both compete at the higher end of the accessorie­s market, but the lower priced HIPGear products have made excellent inroads for a newer product line, and are already being sold at CompUSA, Zellers, Blockbuste­r, Wal-Mart Canada, and Toys-R-Us.­  

One of the big questions heading into this retail holiday season was whether the Game Platform manufactur­ers (Sony, Microsoft and Nintendo) would drop their MSRP.  Nintendo dropped the price of their GameCube several months ago, but the prices of the Playstatio­n2 and Xbox have remained fairly constant, with these two platforms instead choosing to bundle additional­ products with the platform, rather than drop the price.  We had expected that the prices would break the psychologi­cally important levels of C$199 or US$149 for the PS2 and Xbox.  However, barring one or two limited offers, the widespread­ price cuts have not been made, yet.  A recent survey of platform prices is on the right.

Also this quarter, Mad Catz announced that they would be producing accessorie­s for Nokia’s N-Gage multi-use phone, PDA, gaming system, which originally­ retailed for US$299, but has recently been offered for as low as US$199 including three games.  We do not hold too much hope for significan­t revenues to be generated by this new system as it has been widely panned by the technologi­cal press as a “not particular­ly good at anything” product.  Hopefully,­ Mad Catz does not spend too much time and resources on the developmen­t of N-Gage products so that payback is quick and they can move on to more productive­ projects.

So far this season, retailers have been reporting very strong sales of electronic­ goods.  US retailers like BestBuy (BBY-NYSE)­ and Circuit City (CC-NYSE) both report excellent sales of electronic­ equipment,­ both quote strong demand for digital cameras and TVs, but neither mentioned video game systems nor their accessorie­s.  Further industry-w­ide informatio­n about the success of the quarter will likely come out prior to the Company’s quarterly announceme­nt, which is expected in February.

Financiall­y, the fiscal third quarter, which ends December 31st, is the Company’s most important and typically the most profitable­ of the year.  We are expecting EPS of US10¢ per share for Q3-04.  However, to achieve this projected level of profitabil­ity the Company needs to maintain a good gross margin level; something which they have not been able to do in the last two holiday seasons.  The recently acquired GameShark brand will be key to maintainin­g a high level of profitabil­ity as it is a new division to the Company and can generate very high margins.  The Company also has an operating line of credit for up to US$35 million and we have estimated that they will likely use the majority, if not all, of that credit room in order to fund their sales and inventory build up.  The operating line stood at $17 million at the end of September and $23.7 million in December 2002.

Due to the loss incurred in the first quarter of fiscal 2004, the expected EPS for fiscal 2004 is US9¢.  Depending on the valuation method and assumption­s used gives us a valuation range of C$1.32 to C$1.67, averaging out at approximat­ely $1.50. 

To read further research on Mad Catz Interactiv­e, please click here.

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Gruesse und mit viel Vorfreude auf Morgen....­.

P.