The Wii is an unqualified smash hit for Motley Fool Stock Advisor selection Nintendo (OTC BB: NTDOY.PK). Unit sales for the Wii are outpacing competing products from Microsoft (NASDAQ:MSFT) and Sony (NYSE:SNE) in multiples, not percentages, in the U.S. and Japan.
So it didn't take much brainpower to know the company's first-quarter results would be very good. But just how good was a bit of a mystery. That sales more than doubled compared with last year isn't a surprise, given the price point of the Wii, the number of units sold, and that there were no Wii sales in last year's results. But operating profit more than tripling is simply stunning. It's not a total shock, but I didn't think the company would do quite that well at holding operating costs in line while moving so many consoles. Considering a balance sheet that was never a concern and an installed base of more than 47 million Nintendo DS handhelds sold since the product was introduced, it's hard to find any weaknesses in Nintendo at the moment.
With its first-quarter numbers coming in stronger than Nintendo had expected, it not only upped its guidance, but also upped its estimated dividend payout for the year. Nintendo follows a model based on percentage of operating earnings, and with those operating earnings being so robust, it now expects it will pay out 960 yen, or $8.00 per share and $1.00 per American depositary receipt, in dividends instead of the previously forecasted 700 yen ($5.83 and $0.73). That's not the new level of the recurring dividend, because the dividend depends on current operating income, but it's a very impressive chunk of change coming shareholders' way and explains a big part of the run-up in the shares.
With Wii consoles still in short supply, it's safe to say that Nintendo should have strong console sales at least through Christmas, and maybe longer, before they begin to slow down materially. If the company can build the total units sold up into the range that it enjoys with the DS, it would also be able to milk a few years of very profitable software sales out of the Wii.
For investors, the tricks, or problems, to understanding whether to buy, sell, or hold Nintendo from here aren't small. To do so requires an understanding of what sales growth will be over the next few quarters, where growth will stabilize over the next couple of years, and whether Nintendo can maintain or gradually increase that growth in future years, or will it trail off? Mixing different assumptions together and coming up with a range of answers is probably the best bet. As is remembering that history says the next cycle of console rollouts will bring with it additional competition that eats away at margins and console sales. That's probably two to three years away, at least, and until then, Nintendo looks likes it's in a very good position.
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Nathan Parmelee owns shares of Microsoft. He doesn't own shares in any of the other companies mentioned, but recently found a Wii online. The Motley Fool has an ironclad disclosure policy.
