Borg, I share your frustration, but the comparison with THDO is not
a useful one. THDO earned 8 cents in the most recent quarter, down
from 10 cents a year ago. A P/E of 17.5 is still a huge discount to
the industry average: it seems amazingly low considering that THQI
has met or exceeded earnings estimates for 12 quarters and its Q4
1998 looks stronger than 1997 with Rugrats in the pipeline. But
that is too distant for investors to factor in.
The imminent concerns are probably more sector related. Broderbund,
Activision and Acclaim all reported poor to mediocre earnings and
some of these are companies with big franchise titles. I actually
think the sector's fundamentals are stronger now than before and
ERTS, the industry leader, and THQI are proof of that. Activision's
and Broderbund's problems are company specific. If THQI continues to
distinguish itself from the rest of the pack--as I think it will--it will stand
out among a small pool of successful companies in the sector.
The other concern is related to the broader market. All of a sudden
investors have started to focus on frothy valuations and high P/E
multiples (justified in part by tumbling bond yields and low borrowing
costs). The amazing part is that based on trailing earnings, THQI's
P/E of 17.5 is well below the market and sector average at a time when
its growth prospects have been superior to the market and sector
average. The sector average P/E as I've said before is closer to
29 and Volpe Brown's conservative target is around 23.
This stock has discounted nothing but negative news in the past month.
We are still nearly $10 below THQI's 52-week high because management
probably made the prudent decision to rein in costs and not renew the
WCW license. The recent pullback from $25 is a healthy one I think.
THQI had a good runup and it needs to consolidate before moving higher.
The last concern may be seasonal. This is not the strongest season
for the industry. THQI earned 12 cents a year ago. While it will
not have any problems beating year ago comps., I don't think that
it is a good idea to be too optimistic with earnings this quarter.
I'm above average bullish. Although I would be very pleased if THQI
met estimates of 36 cents, I am hoping THQI will earn 39 cents. I'm
reluctant to raise my target higher after seeing what happened to
Broderbund, which with the help of Riven only managed to earn 18
cents in the most recent quarter. Take a look at Acclaim and ATVI.
While we have evidence that WCW sales have been strong, I am putting
WCW sales in a seasonal context. By the way, I expect WCW to add
heavily to Q1 revenue (I hope it's more than 90% because this game
will become less popular in a year.) Under the risk section of THQI's
10K (ironically) it's noted that the largest revenue gain for a newly
released game is during the first few months of its release. This has
always been the case with new products that THQI has released.
p.s. I was speaking with a Nickelodeon production assistant at a party
over the weekend and we started to talk about Rugrats. She confirmed
that it is Nickelodeon's highest-rated program. While she knew about
the feature movie in the Fall, I couldn't get any details on it. Does
anyone have Nickelodeon contacts? It would be useful to get more on
the movie deal and how many PC units Broderbund plans to ship, etc.
cheers,
Bleeker |
