Todd:
Thanks for the feedback. Below are my revised sales and earnings scenarios using the NOL carryforward and
a 35% tax rate for 1998. I also increased the float (I used your figure of 7.5 million because it seemed
like a good conservative estimate.) (Anyone interested in the assumptions underlying the model should look
to my earlier post.)
THQ 1998 A 1998 B 1998 C 1998 D 1998 E
Net Sales $90,000,000 $100,000,000 $110,000,000 $120,000,000 $130,000,000
Cost of Sales $49,008,866 $54,454,295 $59,899,725 $65,345,154 $70,790,584
Royalties $13,146,438 $14,607,154 $16,067,869 $17,528,585 $18,989,300
Selling, G & A $16,266,585 $18,073,983 $19,881,382 $21,688,780 $23,496,179
Other Expenses $2,553,348 $2,837,053 $3,120,758 $3,404,463 $3,688,169
Total Costs $80,975,237 $89,972,485 $98,969,734 $107,966,983 $116,964,231
Operating Inc $9,024,763 $10,027,515 $11,030,266 $12,033,017 $13,035,769
Net Interest Inc $1,089,575 $1,210,639 $1,331,703 $1,452,767 $1,573,831
Income B4 Taxes $10,114,338 $11,238,153 $12,361,969 $13,485,784 $14,609,600
Income Taxes $2,752,518 $3,145,854 $3,539,189 $3,932,524 $4,325,860
Net Income $7,361,820 $8,092,300 $8,822,780 $9,553,260 $10,283,740
Net Inc per share $0.98 $1.08 $1.18 $1.27 $1.37
Shares 7,500,000 7,500,000 7,500,000 7,500,000 7,500,000
P/E Ratio 25 25 25 25 25
Fair Value $24.54 $26.97 $29.41 $31.84 $34.28
The question being batted around recently, most enthusiastically by our resident short, is whether or
not THQ has sufficient working capital to realize sales of this magnitude. I calculate, assuming 100% of NI
goes to retained earnings, that the maximum rate of sales growth that THQ can attain over my 1997 estimated
sales of $78.5 million without taking on any debt is about $105 million --- close the company forecast for 1998.
From where the financing if not from debt or equity? I calculated that increasing sales by 30% (10 $105 million
from my 1997 estimate of $78.5) THQ will need about $14.2 million in new investments. Internal financing from
retained earnings will provide about $9.2 million and the spontaneous growth of Accruals
and A/P will generate about another $5.3 million, leaving a small financing cushion of about $300,000.
Here are my calculations:
1998 Projections
1998 Projected Sales $105,000,000
1997 Estimated Sales $78,459,000
Projected Change in Sales $26,541,000
Sept 1997 Profit Margin 8.7%
Additional Investments Required
Sept 97 Assets/ Sept 97 Sales
* Projected Change in Sales $14,187,066
Spontaeous Financing from Payables/Accruals
(Sept 97 AP+ Sept 97 Accruals)/Sept 97 Sales
* Proj Change in Sales $5,342,434
Internal Financing from Retained Earnings
1998 Proj Sales * Sept 97 Profit Margin
*(1-1997 Div Payout Ratio) $9,167,839
Net Financing Needs
Additional Investment less
Spontaneous and Internal Financing $(323,207)
Plugging the $105 million in sales into the projections above I get a fair
market value of about $28. I know we have the line of credit with Imperial, but
it seems to me that $105 million or so is the likely maximum that THQ can finance next
year. The only way I could get close to your estimate of $130 million or so
was by either 1) estimating $50 million in sales in 4Q 1997 (which I think is what you
are assuming) or 2) leveraging the balance sheet. I may be being too conservative in my
assumptions, but that's ok, I have no trouble thinking of my estimate as a lower bound.
However, I certainly would not mind reaching $130 million in sales next year. Since I
am seriously considering selling in the high $20s, I am very interested in your
scenario/model. I certainly would not want to sell to early! :-(
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