Frankly, video game publisher THQ's
As unappealing as that sounds, we're going to talk about why I think THQ is one of the Hidden Gems of the video game industry.
Up until this point, THQ has made its success in games targeting kid gamers ages 6-14. Aside from the yearly wrestling games carrying World Wrestling Entertainment's
But that's exactly what makes THQ hidden, and that's exactly why THQ is a gem.
You see, THQ has carved out a neat, reliable little niche for itself where it doesn't face impossible competition. While Grand Theft Auto should top the charts, it's not exactly the kind of game the responsible parent seeks to buy for his 6-year-old. So it makes sense that THQ can expect three of its games released during the current holiday quarter to sell more than 1 million units -- the game based on Pixar's The Incredibles, Nickelodeon's The SpongeBob SquarePants Movie, and WWE SmackDown vs. Raw. The next two biggest titles released this quarter are Tak 2 -- also Nickelodeon-related -- and a game based on Warner Bros. animated movie The Polar Express.
Based on these games, THQ expects to earn $1.15 per share on net sales of $330 million during the holiday third quarter. That's why it was so vital that, earlier this week, THQ scored a key save in extending its master interactive licensing agreement with Nickelodeon through 2010, where the relationship was temporarily in doubt (see Will THQ Be Nicked? and Redstone's Love of the Game).
On top of that, THQ has moved to establish itself with the core gamer by introducing more mature titles with names such as Full Spectrum Warrior, S.T.A.L.K.E.R., and Destroy All Humans! Early this month, the company picked up a potential winner when it acquired street racing simulation Juiced from bankrupt Acclaim (see THQ Gets Juiced).
Importantly, the company knows its limits. Rather than introduce these new mature brands in the holiday season when the company knows it can't win, THQ has adroitly pushed back the release of some of the more mature games into the fourth quarter and scheduled the release of Juiced in the first quarter of fiscal 2006.
Establishing itself as a competitor to Take-Two, Activision, and Electronic Arts won't be easy. But the way I see it, the investor pays for THQ's success with the younger gamers, and -- so long as the company doesn't fall flat on its face -- everything else is gravy.
In its earnings release, THQ backed its full-year forecast of earnings of $1.10 per share on net sales of around $680 million. At yesterday's closing price of $18.53, that puts the stock at about 17 times this year's earnings -- but back out the $4.80 per share in cash on the company's balance sheet, and the stock doesn't look all that expensive.
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Fool contributor Jeff Hwang owns shares of Electronic Arts.