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TheStreet Open House

MRFI and Changyou.com Are Two Undervalued Stocks in an Overvalued Market


Another undervalued stock is Changyou.com Limited (CYOU).

Changyou is an online game developer and licenser headquartered in Beijing. It is a spinoff of the even larger Chinese Internet company Sohu (SOHU) and primarily focuses on developing massively multiplayer online games.

Just recently it agreed to purchase 51% equity stake in mobile technology developer MoboTap as part of Changyou's strategy to boost its mobile market presence.

Unlike many other technology-based companies, Changyou has consistently earned substantial net income in recent years and does not trade at exasperatedly high P/E and P/B ratios.

In 2013 it earned $268 million in net income on revenue of $737 million. Changyou also boasts a return on equity of 21% and is trading at a 7 P/E ratio.

Changyou ended 2013 with $650 million in current liabilities and $1 billion in current assets, the majority being cash and cash equivalents. Its market price does not justify the strong balance sheet as the company is currently trading at a 1.5 P/B ratio.

Its shares, at around $25, are down 23% for the year to date. This price dip is without substantiating news. This move, combined with the company's strong financial position, makes Changyou a prime opportunity for value investors looking to buy in at a reduced price.

Changyou's future is highly contingent on its ability to stay relevant in the quickly changing world of online gaming. At a $1.3 billion market cap, it is one of the smaller players (no pun intended) within an industry controlled by NetEase (NTES) at $10.68 billion and Giant Interactive Group (GA) at $2.87 billion.

At the time of publication the author was long CYOU.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates MFRI INC as a Buy with a ratings score of B-. TheStreet Ratings Team has this to say about their recommendation:

"We rate MFRI INC (MFRI) a BUY. This is driven by a number of strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, attractive valuation levels, good cash flow from operations and impressive record of earnings per share growth. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 6.2%. Since the same quarter one year prior, revenues slightly increased by 8.8%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The current debt-to-equity ratio, 0.41, is low and is below the industry average, implying that there has been successful management of debt levels. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.23, which illustrates the ability to avoid short-term cash problems.
  • MFRI INC reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. During the past fiscal year, MFRI INC turned its bottom line around by earning $1.76 versus -$3.00 in the prior year.
  • Net operating cash flow has significantly increased by 89.82% to -$1.32 million when compared to the same quarter last year. In addition, MFRI INC has also vastly surpassed the industry average cash flow growth rate of -2.92%.

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