Analyst Upbeat On THQ Prospects

THQ posted big losses in fiscal year 2009, leading to job cuts and studio closures, but a promising pipeline and strong sales of new games such as Red Faction: Guerrilla and UFC 2009 have one analyst optimistic. "We are increasingly more optimistic on [THQ's] near term financial prospects as our focus shifts from near term liquidity concerns to their upcoming game pipeline where buzz is beginning to build," Mike Hickey with Janco Partners said in a research note on Wednesday. "Management continues to rebuild credibility through execution on planned cost cutting, increased financial transparency and recent / upcoming product releases including UFC 2009: Undisputed that meaningfully exceeded our initial expectations." THQ posted losses of $431 million for fiscal 2009 on slow sales of games, performance that led the publisher to cut 24 percent of its workforce, or 600 jobs. THQ recently said it is on track in cutting $220 million in costs. THQ stock has been on the rise for the past month, closing on Tuesday at a seven-and-a-half month high, according to TradingMarkets.com. Today, shares climbed further to $8.70, or 0.58 percent, in morning trading. THQ announced last week that it shipped 2 million copies of the licensed mixed martial arts fighting game UFC 2009: Undisputed. Hickey raised his fiscal 2010 sell-in estimate for the game to 2.75 million units for the fiscal year from 2.025 million. "We expect high demand / quality will contribute to strong catalog sales," he said. Last week's release Red Faction: Guerrilla has received strong reviews and appears to be selling strongly at retail, but not as strongly as Hickey expected. The analyst lowered fiscal year sales estimates to 1 million units from 1.275 million. "We expect Volition’s physics based destruction engine could be integrated into future game releases with a stronger base concept." While recently released THQ games have exhibited good performance, Hickey noted "lingering concerns" about profitability for the current fiscal year, "given [THQ's] core gamer releases including Red Faction may have incurred development costs north of $30 million." However he acknowledged "the potential leverage of their operating model from a hit game like UFC." This year, Hickey estimates that Blue Fang's Marvel Super Hero Squad and Rainbow's MX vs. ATV Reflex will sell over 1 million units. He also forecast Vigil Games' action game Darksiders to sell 1.575 million based on a "surprisingly strong" E3 showing. The analyst is more hopeful about next fiscal year (fiscal 2011), which will see games including Kaos Studios' Homefront, the Warhammer 40K-based Space Marines, and the "possibility" of a Saints Row 3. Hickey is estimating Q1 2010 revenues of $219 million, above street consensus of $186 million. Hickey rates THQ stock as "buy."