THQ's Incredible Quarter

Playing video games is a lot of fun. But something that might be even more enjoyable -- and profitable -- is investing in the video game sector. So let's take a look at how one of the key software publishers in this area -- THQ (Nasdaq: THQI  ) -- did in its fiscal third quarter.

The headline of the press release is the kind that shareholders dream about -- earnings per share doubled on sales that went up by well over a third of the previous year's third-quarter haul. Quite an impressive showing. Let's take a look at some of the stats.

Net sales came in at $400.3 million this quarter against $293.1 million achieved in the same time frame last year. Net income was $62.9 million ($1.58 per diluted share), compared to $30.4 million ($0.78 per diluted share) a year ago. The $1.58 included some beneficial tax credits related to research and development concerns (equivalent to $0.20 per share), so backing that out brings the earnings number to $1.38 on a non-GAAP basis.

Fools who own stock in either Disney (NYSE: DIS  ) , Pixar (Nasdaq: PIXR  ) , Viacom (NYSE: VIA  ) , or World Wrestling Entertainment (NYSE: WWE  ) will be happy to hear which titles helped THQ earn $1.32 per diluted share for the first nine months of the company's fiscal 2005 period vs. $0.78 per diluted share for the first nine months of fiscal 2004: The Incredibles, The SpongeBob SquarePants Movie, and WWE SmackDown! vs. RAW. Millions of units were shipped for these licensed games, showing that strong intellectual properties can indeed serve as a valuable selling point in the marketplace.

The risks going forward for THQ would be such things as the specter of rising development costs, tougher terms from licensors, and cycles where the company's slate of games fails to ignite a hot streak (comparable to Disney or Viacom having bomb after bomb at the box office). Plus, Activision (Nasdaq: ATVI  ) and Electronic Arts (Nasdaq: ERTS  ) are formidable competitors and should never be discounted.

THQ is getting close to its 52-week high and it sports something of a lofty price-to-earnings ratio (putting it on a similar level with Electronic Arts). Nevertheless, I have to agree with colleague Jeff Hwang -- there seems to be a lot to like here. With new consoles on the horizon, THQ should be an interesting play.

Here is more Foolish perspective on the video game industry:

Activision, Electronic Arts, and Pixar are all selections of Motley Fool Stock Advisor, a newsletter that can help the individual investor beat the market. Subscribe today without risk for six months.

Fool contributor Steven Mallas owns shares of Disney. Don't forget to check out the THQ discussion board -- get in the game by posting your thoughts on the company and its future.


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