Yu-Gi-Oh gains popularity By Thom Calandra, CBS.MarketWatch.com Sept. 27, 2002

THOM CALANDRA'S STOCKWATCH

Kids have icons, too
4Kids shares perk up as Yu-Gi-Oh gains popularity

By Thom Calandra, CBS.MarketWatch.com
Last Update: 10:35 AM ET Sept. 27, 2002

SAN FRANCISCO (CBS.MW) - Yes there is a non-gold company that is beating the stock market, Virginia (or Oklahoma, Nebraska and New York.)

Shares of 4Kids Entertainment this week perked up, about a month after the company reported routine earnings. The Manhattan-based 4Kids produces or owns the rights to a slew of kiddie shows, including word-of-mouth sensation "Yu-Gi-Oh" from Japan.

The television and merchandising company's New York Stock Exchange-traded shares have risen 20 percent since the company reported a small quarterly profit in August. Shares of 4Kids since Jan. 2 are surpassing the New York Composite Index by about 35 percentage points.

"We are starting to see institutions and money managers realize the Yu-Gi-Oh property could be bigger than Pokemon," says Robert Routh, who follows the company for small investment bank Arnhold & S. Bleichroeder. "With Yu-Gi-Oh, 4Kids gets a better share of the economic pie (royalties, marketing reimbursements and so on) than it did with Pokemon."

For those who don't speak kids-lingo, Wall Street has punished children's programmer 4Kids for two years now, after the ton of money the company made from the Pokemon craze. Year-to-year sales and earnings comparisons at 4Kids make it hard for most investors to see where the sizzle is.

Yet some investors must like what they see on the Saturday morning tube. The 4Kids outfit has "Kirby," "Fighting Foodons" and other packages on the Fox Kids network. What's in the pipeline may be enticing new investors into the company's stock.

On the spring schedule is "Teenage Mutant Ninja Turtles," which 4Kids is co-producing. For those who see Turtles as a 15-year-old has-been, read my lips. Kids are digging the turtles today as much as they were when the concept debuted in the 1980s.

"Yu-Gi-Oh," about a Japanese teen who transforms into hot stuff when he plays a monstrous card game, is big chat in the school playground. It's on American television, Kids WB, six days a week.

The 4Kids strategy, as CEO and Chairman Al Kahn has explained to me several times, is to grab boys of all ages, and with them, a few gals, too. Plus, as Kahn says, Pokemon is still around on television, in video release and in the ever-present card games that drive teachers crazy. "It's a brand that is not going to go away," Kahn tells me regularly.

The company's four-hour block of new shows on Fox has tie-ins with Toys 'R Us. Kahn's 4Kids also has programs showing overseas, most recently its robot-series "Cubix" that launched in Britain. "Yu-Gi-Oh," a bunch of high-schoolers battling virtual reality monsters, shows in many European countries and in Britain as well.

Kahn, the creator of the Cabbage Patch dolls years ago, is banking on his company's merchandise licensing as a sweet spot for profits.

Kahn and his 4Kids team have video-game, licensing and toy pacts with Mattel, Japanese powerhouse Konami, Nintendo and others. Kahn hopes to get a ton of mileage out of Kirby, a popular Nintendo character.

The folks on Wall Street don't pay much attention to 4Kids, which sports a stock-market worth of $300 million. No major banks write research on 4Kids. Routh and his analyst team at Arnhold & S. Bleichroeder have a fair-value target of $24 on the shares, which sell these days for $23.

Routh wants to see an indication of greater profits later this year before he slaps a higher fair-value target on 4Kids shares.

"This is a company with no debt and just one class of stock," says Routh. "The biggest thing is Yu-Gi-Oh. They just released it on DVD and video, and an audio soundtrack comes out next month."

Terra Lycos, the operator of the Lycos Internet search engine, just reported the term "Yu-Gi-Oh" was the ninth most popular across user searches for the week ending Sept. 21. The top one was - no, not Martha Stewart -- "Dragonball."

The Terra Lycos survey reported, "Yu-Gi-Oh merchandise looks to be the hot Christmas gift of 2002. Yu-Gi-Oh has a younger audience than Dragonball, and like Pokemon, the searches revolve more around the card game than around the television show."

Kahn in previous interviews - I placed a call to him Friday - has dismissed Hollywood's "story arc" as aimed too much at adults (Disney's "Hunchback of Notre Dame" is probably the best example) and not at all at boys ages 5 to 15. "We know what kids like to do in their play time," says Kahn. "It's action adventure."

Kids have icons, too. Wall Street, busy behaving like Sesame Street, some day will come around to that view.