Mario and his brother Luigi – the heroes of Super Mario Bros. fame who embark on a cyber-quest to rescue Princess Toadstool — are world-famous. Nintendo (7974 JP), the company that created the iconic video game, however, has seen better days; after trading as high as ¥27,000 in February, it has plunged more than 50% and now changes hands for less than ¥12,000 per share. Is this an opportunity for value-conscious investors to don their super-hero garb and sprint to Nintendo’s rescue by snapping up the stock cheaply?

Whoa, there. While the stock looks inexpensive compared to its recent price history, StarMine valuation models signal that it may not be the bargain that it appears to be. In fact, Nintendo ranks among the most expensive of all Japanese stocks on a valuation basis, a sharp reminder that an ultra-low stock price can signal that a company is a value trap. Using the StarMine Relative Valuation (RV) Model, Nintendo emerges with a score of 3; it ranks even lower on the StarMine Intrinsic Valuation (IV) Model, where it has a score of 1.

Taking a closer look, the reason for these dismal scores becomes apparent. In the chart below, the green line represents Nintendo’s forward 12 month price/operating profit ratio (P/OPR). (Operating profit is a key measure of earnings in Japan, and typically replaces earnings per share (EPS) in valuation metrics and as a gauge of a company’s profitability). As you can see, the P/OPR ratio for the next 12 months currently stands at 32, much higher than the historical 10 year median of 14 (represented by the blue line in the chart below). The reason for this wide gap? Nintendo’s operating profits have been falling even faster than its stock price.

Source: Thomson ONE / StarMine

Falling operating profits, declining free cash flow and an enterprise value that is almost three times the market capitalization of the company all contribute to the weak RV score. Unless Nintendo can revive sales of both its software (games) and hardware (DS3), it may continue to get even “cheaper”. The company may be in need of a super hero, but investors may want to wait to see evidence that consumers are racing to its rescue by buying its products before they decide to snap up the stock.

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