THQ (NASDAQ:THQI) had an exciting year. All video game publishers -- such as Activision (NASDAQ:ATVI), Electronic Arts (NASDAQ:ERTS), and Take-Two Interactive (NASDAQ:TTWO) -- gave thanks to Sony (NYSE:SNE), Microsoft (NASDAQ:MSFT), and Nintendo for ushering in the new generation of consoles. A whole new crop of hardware means plenty of opportunity to sell tons of software. Let's have a look at the progress THQ has made.
Back in February, THQ reported earnings for its fiscal third quarter. Jeff Hwang had covered the data at the time; he wrote an article that also included EA's latest quarterly missive to investors. While EA had disappointed Wall Street with an earnings miss, THQ ably saved the day like SpongeBob SquarePants in superhero guise rescuing his buddy Patrick from crisis -- indeed, THQ beat market expectations on the backs of such licensed game products as the aforementioned sea goofball and Disney's (NYSE:DIS) The Incredibles. Revenues and earnings per share may have dropped 10.6% and 31% respectively, but that was acceptable since the video game industry was suffering through the transitional period from the old hardware to the new hardware that would make its way to market come the fall.
Then, in June, THQ filed its 10-K. Shortly thereafter, I wrote a commentary inquiring whether investors should play around with the shares. I quoted some data from the annual document which showed that earnings per share were indeed being pressured by the absence of the PlayStation 3 and the Nintendo Wii, as well as the fact that the Xbox 360 still needed to grow its installed user base. While sales went from $641 million in fiscal 2004 to $807 million in fiscal 2006, earnings per share dropped from $0.61 to $0.52 in those same respective years. Free cash flow also took a mighty tumble, dropping from $61 million in 2004 to a paltry $7.4 million in 2006 (I included acquisitions as well as capital expenditures in my calculations). Yet I found something interesting -- EA had no free cash left over after acquisitions and expenditures. I also believed THQ to be possibly cheap then, at around $20 per share.
Moving on to the end of July, we received word that THQ had reported a dreaded loss. Indeed, the GAAP red ink tripled to $12.1 million, or $0.19 per diluted share -- this on top of a 12% decline in revenues! But, being the optimistic Fool that I am, I took solace in the fact that sales for the game based on the Disney CGI hit Cars were better than anticipated. Not only that, but the game was scheduled to be ported over to the Xbox 360 and Wii platforms in time for the holiday selling season. THQ had reduced its costs and expenses by 4% to help manage its business through this challenging time frame. I remained optimistic, once again thinking that THQ had a heck of a licensing program under its aegis. Also, I consider it a competent developer of original properties, such as the humorous Destroy All Humans! title, which is a colorful throwback to bad (and by bad, I mean good) sci-fi B movies.
Last month, THQ delivered its final data set to investors. It was a "saintly" second quarter, to be certain, even though the publisher was reporting only preliminary numbers since it was undergoing an informal inquiry over options-granting practices (it should be noted that a delisting notice was sent to the company). Even so, those numbers handily beat ol' Mr. Market. I marveled over the fact that the market was thinking that THQ would only come up with a few cents in earnings per share. On a GAAP basis, the company delivered $0.19 per share, or $0.25 per share excluding the effect of options. Either way you sliced it, it was a landslide victory, and it offered proof that the stock had "investment potential" written all over its certificates. This was great news ahead of the Christmas selling season, because it indicated that the publisher was strong going into the competitive shopping maelstrom. While the licensed properties continued to buttress the overall business model, I again was able to highlight the positive issue of original property development. Saint's Row turned out to be a very popular game on the Xbox 360 platform, having shipped a million copies at that point.
Overall, THQ had a good trailing 12 months. It's investing in its business to ensure quality game development down the line, and it is finding success in launching titles it developed on its own. The stock has performed well this past year; at this time, it's trading near its 52-week high.
What does the future hold? To get a bit of a handle on this, we can use the CAPS community database to see what other investors think might be in store for THQ.
|
THQ | |
|---|---|
| CAPS Rating | *** (out of five stars) |
|
Bulls |
87 |
|
Bears |
35 |
|
Bull Ratio |
71% |
|
Bear Ratio |
29% |
While this isn't a crushing bull victory, it can easily be seen that there is more positive sentiment for THQ than there is negative sentiment. And I love some of the comments from the CAPS community. Member whansard says: "Gamers unite . . . buy those consoles!" Another member, fibreoptik, humorously mixed politics and investing commentary: "Democrats have the House and Senate, video games are getting new life, these are good times! =)." And mrtad99 had this simple, exclamatory statement: "Publisher of the SpongeBob SquarePants games!" So true -- that character really is shareholder-value friendly.
In conclusion, it can be seen that THQ's prospects might turn out to be as colorful as a Nickelodeon cartoon. It should ship millions of copies of its major franchises for the new consoles. Video games are a long-term growth story -- THQ's business model is set to capture a good amount of this sector's future spoils.
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What a year it was for THQ:
Check out the other companies featured in "The Motley Fool's 2006 in Review and 2007 Preview" special.
Disney, Electronic Arts, and Activision are Motley Fool Stock Advisor picks. Microsoft is an Inside Value recommendation.
Fool contributor Steven Mallas owns shares of Activision and Disney. The Fool has a disclosure policy.
