THQ's Saintly Quarter

THQ (Nasdaq: THQI  ) reported preliminary numbers for its second fiscal quarter last week, and they were mighty impressive. But they are "preliminary" because the company is going through an informal inquiry relating to options-granting practices, with data restatements possible as a result. Nevertheless, we can still glean some useful insight, and we can be assured that THQ knows how to play the game it's in.

Net sales for the quarter rose 68% over last year to $240.2 million. Operating income was $14.8 million, a significant improvement over the operating loss of $3.4 million observed last year. Net income was $12.6 million, or $0.19 per diluted share including option expenses -- whereas last year, the company lost two pennies per diluted share. Excluding the effect of options, THQ took in $0.25 per share. Know what Wall Street thought this quarter was worth? It expected three pennies of profit per share. Talk about obliterating expectations!

Like two other major players -- Motley Fool Stock Advisor recommendations Activision (Nasdaq: ATVI  ) and Electronic Arts (Nasdaq: ERTS  ) , which recently reported -- THQ is an ace at putting together a shareholder value-enhancing pipeline into development and executing on its distribution. Granted, the year-over-year comparisons were rather easy, but these results prove that THQ knows what its demographic wants and that it isn't merely treading water before Sony's (NYSE: SNE  ) PlayStation 3 and Nintendo's Wii arrive.

Besides having success with licensed products such as games based on Disney's (NYSE: DIS  ) Cars cartoon and Viacom's (NYSE: VIA  ) Nickelodeon slate -- and for all the parents of young gamers out there, yes, you will be buying the latest SpongeBob SquarePants adventure -- THQ is creating its own intellectual properties. Gamers have warmly received Saint's Row for Microsoft's (Nasdaq: MSFT  ) Xbox 360, and the game itself has given THQ some nice exposure to adult consumers -- a million copies have been shipped to date. In addition, that funny alien creature from Destroy All Humans! is back in an all-new adventure.

The holiday season will be kind to THQ. Shoppers will need to buy a decent amount of software to go along with the new systems so that recipients will have something to play on Christmas morning and beyond. And yes, the new consoles might be short in number this season, but don't let that get you down -- there are plenty of other platforms out there for THQ to make money with, including the hot Nintendo handheld devices. In time, the installed user base for the fresh hardware will build out.

THQ has upped its guidance since last summer. Back then, it was expecting earnings for fiscal 2007 to fall between a range of $0.90 and $1.00, not including $0.16 of stock-compensation expenses. Now, that forecast has been upgraded to a range between $0.95 and $1.05, not including about $0.18 of stock-compensation charges.

The stock has had a run-up since the summer, so it might not be as cheap as it was back then, but current shareholders shouldn't bail. Not only has guidance improved, but it also wouldn't make sense to bail on the company ahead of the console revolution. I would expect that THQ stands a good chance of beating expectations and raising guidance going forward. In other words, I think the stock has room to grow.

If you're not a current shareholder and the recent movement in the stock toward a 52-week high has you concerned, then be on the lookout for pullbacks. THQ will be growing earnings and cash flows over the next several years. The game has only begun. Granted, the presence of the informal stock-option inquiry remains, but I still think the company is a great investing idea.

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Microsoft is aMotley Fool Inside Valuepick. Activision, Electronic Arts, and Disney are part of theMotley Fool Stock Advisorfamily of recommendations. You can try any of our investing newsletter services free for 30 days.

Fool contributor Steven Mallas owns shares of Disney and Activision. As of this writing, he was ranked 1,312th out of 12,147 investors in the Motley Fool CAPS system. Don't know what CAPS is? Check it out today! The Fool has a disclosure policy.


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