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<<Subject: THQI
Date: Fri, Feb 26, 1999 08:48 EST
From: RevShark2
Message-id: <19990226084848.13524.00000786@ng-ch1.aol.com>
SELZ: THQI: Now the Most Compelling Oppty We've Seen In 2 1/2 Years of
Following This
08:41am EST 26-Feb-99 ING Baring Furman Selz LLC (Stewart A. Halpern (212) 3
ENTERTAINMENT
THQ Inc.
(OTC: THQI-22)
Now the Most Compelling Oppty We've Seen In 2 1/2 Years of Following This Stock
Stewart A. Halpern (212) 309-8503
February 26, 1999 Kavir Dhar (212) 808-3638
STRONG BUY
52-Week Range: 32-9 EARNINGS PER SHARE
Daily Vol(000s): NA 1997 1998 1999E
Shares O/S(mil): 12.1 PRIOR NEW PRIOR NEW
Market Cap(mil): $265 Mar $0.08 $0.57 $0.57 NA NA
Avg. ROE 1998: 47.5% Jun $0.09 $0.25 $0.25 NA NA
EPS Growth: 25% Sep $0.13 $0.21 $0.21 NA NA
Debt/Capital: 0% Dec $0.56 $0.72E $0.95A NA NA
Book Value/Share: $3.94 $0.90 $1.75E $2.00A $2.22 $2.28
Dividend/Yield: $0.00/0.0% 24.4x 12.6x 11.0x 9.9x 9.6x
Insider Holdings: 6%
S & P 500: 1253
In addition, numbers may not add due to changes in share count. Results do not
include one-time events-
* We are increasing our EPS estimates for 1999 based on yet another quarter of
out-performance and the very strong '99 outlook discussed on yesterday's
conference call.
* Adding confidence to the '99 outlook was confirmation by mgmt. of plans for
'99 releases of: 2 WWF products in Q4, 4 Rugrats products, 2 Pentium III OEM
products and 5 LucasArts titles for which THQ has exclusive distribution rights
in German-speaking Europe (much of this revenue is expected in Q3, the only
quarter w/out sales of wrestling product).
* THQ's cash position should soon be >$50mm (over $4/share) as holiday sales'
receivables get paid (not including $18.5mm - $1.50/share - in reserves),
leading mgmt to state that they expect no foreseeable needs for outside
financing
* We vociferously reiterate our Strong Buy recommendation: we believe our new
1999 EPS estimate of $2.28 will prove to be conservative, increasing confidence
in prospects for a $45+ price for THQI shares over the next 12 months
December Quarter: Another Out-performance by THQ and Their 16th Consecutive
Positive Earnings Comp
Yesterday THQ announced its December quarter results, which showed better-than-
expected performance on both the top- and bottom-lines. On an "apples-to-
apples" basis, adjusting for a lower-than-anticipated tax rate in Q4 (the
specific application of THQ's long-term NOL is visible only with knowledge of
the company's full-year results) as well as a share count modestly higher than
we expected, the company posted $0.82 in Q4 versus our expected $0.72, and
$1.85 for 1998 versus our expected $1.75.
THQ showed strong margin improvement over 1998 both for Q4 and the full year.
Gross margins were a bit lower than our model anticipated due to stronger-than-
expected sales of lower margin Game Boy and Nintendo 64 games.
The company's operating margins were the highest in the industry, although
lower than we estimated due to the sales mix, but more so due to $2.5mm in
project abandonment costs taken during 4Q98, versus an historic level of
approx. $600,000. Had THQ taken its more normal level of project abandonment
costs, operating margins would have been consistent with our expectations,
adjusting for the sales mix.
Growth Drivers for 1999
For the upcoming year we see a number of visible growth drivers for THQ.
First, the company appears to be having an outstanding 1Q: THQ's new
PlayStation WCW game was for the month of January the #1 selling console game
in the US and the #3 game in Europe; mgmt said on the conference call that
carry-over sales from 4Q98 of their Rugrats game are much stronger than they
expected. We note that THQ will be selling 4 Rugrats products in 1999. Mgmt
also confirmed that they plan to ship 2 WWF wrestling products (one each for
Nintendo 64 and Game Boy Color) for Holiday '99, the promotion of which will
begin with the E3 industry tradeshow in May, as well as 2 Pentium III-capable
OEM PC products, the first 2 products from their GameFx studio acquired in May
1998. Much of the revenue from the new Lucas Arts Star Wars games - for which
THQ has exclusive distribution rights in German-speaking Europe - is expected
in Q3, the only quarter in 1999 in which the company will not be selling
wrestling product.
Strategic Goals for 1999
In addition to growing its top and bottom lines at a minimum of 20% for the
year, mgmt expressed their strategic goals as: adding 1 or 2 long-term brands
to THQ's current wrestling, bowling, BASS fishing, role-playing and Rugrats
franchises; expanding direct international distribution capability by adding
sales organizations in 1 or 2 more territories (of which France, Italy, Spain
and Australia are the priority markets), expanding its PC sales (including high-
end, mass market and OEM opportunities), positioning the company for the
upcoming new hardware (Sega's new machine to debut in the U.S. in fall '99,
Sony's PSX2 expected fall '00, Nintendo's new machine expected fall '01) and to
continue to maintain strict management controls.
We Emphatically Reiterate Our Strong Buy Recommendation; 12-Month Price Target
of $45
We continue to view THQI shares as an outstanding investment opportunity in our
universe.
We believe the company's strong prospects combined with its share price
weakness create the most compelling opportunity for buying this stock in the 2-
1/2 years we have been following the company.
With a foundation of the industry's overall strong fundamentals, THQ's industry-
leading financial and operating performance give us confidence that our new
$2.28 EPS estimate for 1999 is conservative and that this stock will ultimately
reflect more fully the company's outstanding performance and continuing bright
prospects
Gerard
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