Analysts Cautiously Optimistic Of THQ Turnaround

After THQ posted a drastic reduction in annual net loss and a rise in revenues, analysts are cautiously optimistic of the company's future. Wedbush analyst Michael Pachter said in an investor note that THQ's $197.7 million in sales for the fiscal fourth quarter ended March 31 were "significantly above expectations" due to solid sales of Darksiders and Metro 2033. But Pachter, who rates THQ shares as "neutral," also said that growth in the current fiscal year will be difficult because of tough comparisons to last year's UFC 2009: Undisputed, which has shipped 4 million units. Some of THQ's big upcoming games in the year ahead and the following year include sequels to Darksiders, Saints Row, Red Faction, UFC and WWE SmackDown vs. Raw. The new property Homefront from Kaos Studios is also in the works. "Top line growth will depend on continued solid execution," Pachter said. "…We continue to view THQ’s turnaround positively." Lazard analyst Colin Sebastian said that THQ has "stabilized its portfolio of core gamer titles" with solid product releases including UFC, WWE and Red Faction. But he added, "without several break-out hits or large-scale online revenues, we see THQ’s margin profile as still in flux." Sebastian rates THQ shares as "hold." Janco Partners' Mike Hickey rates THQ shares as "buy," stating that the publisher's management, led by CEO Brian Farrell, "restored credibility by exceeding performance objectives within considerably difficult market conditions." Analyst Arvind Bhatiawith Stern Agee, which maintained a "buy" rating for the stock, said that the current fiscal year will be "a year of rebuilding," while next fiscal year will see greater expansion driven by "stronger product performance, good cost control and an increase in higher-margin digital revenues." Signal Hill's Todd Greenwald argued that Vigil Games-developed Darksiders, which sold 1.3 million units since its January launch, "wasn't the real driver of the upside." He attributed THQ sales growth to catalog sales of WWE and family titles. Greenwald said, "While UFC has been a significant hit, we are skeptical that the rest of THQ's release slate will allow it to navigate this challenging environment and meet expectations. We therefore remain on the sidelines, and look to get more constructive at a better entry point." The analyst, who rates THQ shares at "hold," added, "While we are bullish on Saints Row 3, we are skeptical on the success of Darksiders 2 (does 1.3 million units really warrant a sequel?), and believe that the fighting genre and casual segment will be susceptible to weaker pricing and lower tie ratios given how late in the cycle they are coming."