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Why MGT Capital Investments Looks Like a Strong Value Investment

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Many analysts expect shares to double or triple from current prices over the next nine to 10 months. Here's why.

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Speaking of MGT Capital (MGT) – and if we weren't, we should be – there's a lot of noise about the company. In fact, there's so much noise about the company that one has to wonder what's going on: Is there any substance to the racket, or is it simply much ado about nothing? To find out, we need to take a closer look at MGT.

MGT's website states that the company "and its subsidiaries are engaged in the business of monetizing intellectual property." Translation: MGT is a holding company. It seeks out and purchases intellectual property, specifically patents. To this end, MGT holds patents in two areas: casino gaming and medical imaging technology. In the latter sector, MGT owns a subsidiary company called Medicsight. Medicsight is being spun off because it lacks relevancy. To this end, MGT has retained the services of Munich Innovation Group to monetize its medical imaging patents; this is a fancy way of saying that Munich Innovation Group is trying to sell the patents. Some analysts place the value of these patents in the $4 to $5 million range.

Since MGT recognized that its medical sector was failing, it didn't hesitate to do what needed to be done. It laid off employees, got rid of contractors, concluded leases, and got rid of equipment. It essentially dumped the whole medical imaging side of its business, lock, stock, and barrel. The result: MGT has no debt and $5.5 million in cash. That number could escalate to $9 or $10 million, depending on how successful the Munich Innovation Group's efforts are.

MGT's other sector, called MGT Gaming Incorporated, holds a 55% stake in one patent that allows players to vie not only against the house but against other players during bonus rounds in linked slot machines. In November 2012, believing that its patents had been violated, MGT filed suit against five casino companies, claiming patent infringement. The five companies were Caesars Entertainment (NASDAQ:CZR), WMS Gaming (NYSE:WMS), Penn National (NASDAQ:PENN), Aruze Gaming America, and MGM Resorts (NYSE:MGM).

MGT hopes to win the lawsuit. Of course, the defendants are hoping that the case is without basis and frivolous, and is thus tossed out. If MGT's lawsuit proves to be successful, the company stands to make out like a bandit. Royalties from the patent are estimated to be worth $330 million to $4.5 billion.

Adding spice to the mix is the fact that just recently, WMS, a defendant in MGT's lawsuit, agreed to sell itself to Scientific Games (NASDAQ:SGMS) for $26 per share. Both Scientific Games and WMS want the acquisition to achieve culmination because each has what the other needs. Together they stand to increase their revenue streams appreciably, primarily through organic growth and enhanced gaming opportunities.

There is some speculation that Scientific Games will apply pressure on WMS to settle the MGT lawsuit before it goes to trial. If so, and if WMS settles out of court, this would put indirect pressure on the other four defendants to do likewise. Independent analysts seem to believe that the confluence of events works in MGT's favor.

Savvy investors should consider buying up shares of MGT Capital Investments before speculative buyers send shares skyrocketing. If Scientific Gaming's shareholders perceive a risk, they might hedge their bets in an attempt to mitigate losses by buying up MGT shares. If the outcome of the lawsuit previously discussed goes as most observers expect, such an investment will pay off handsomely. Investors will get a share of either the settlements or the amount awarded to MGT by the court. Many analysts expect shares to double or triple from current prices over the next nine to 10 months.

All that to say this: MGT appears to be a strong value investment.

Twitter: @RandallRadic
No positions in stocks mentioned.
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