Wedbush Sees Upside For Activision, EA, THQ

Wedbush Morgan Securities analyst Michael Pachter has released new sales estimates for Activision, Electronic Arts, Midway Games, and THQ, in advance of the companies' imminent quarterly results, seeing largely positive outlooks for the firms. The earnings forecasts follow earlier statements made by Pachter based on a 38 percent growth in September video game sales as reported by research firm NPD Group. Activision - Strong Buy Pachter noted that Wedbush has raised its estimates for major publisher and developer Activision, following the company's pre-announced Q2 revenues of $188 million and elevated fiscal 2007 guidance of $1.150 billion. “For Q2, we are raising our pro forma EPS estimate from $(0.11) to $(0.09) to reflect revenue upside during the quarter,” wrote Pacter in a research note. “We are maintaining our FY:07 estimate for revenue of $1.160 billion and our pro forma EPS estimate of $0.18.” According to Pachter, Activision will not report on its final second quarter results until it has completed an internal review of its own internal investigation concerning the company's stock practices. In July, the company announced that it was under investigation by the SEC for "purported improprieties in the Company's issuance of stock options," at which time Activision representatives also confirms an internal audit of these practices as well. It remains unclear how long the investigation will take to be resolved. However, despite this, Pachter still noted that Webush believes Activision “has a deep and talented management team and are confident that the company will ultimately resolve its options issues without any significant impact on its long-term prospects.” He added: “We believe that the current share price presents a compelling entry point for Activision shares, and recommend that investors opportunistically add to positions.” In addition, Wedbush also has maintained the company's Strong Buy rating and $18 target price. The stock is currently trading at $15.31. Electronic Arts - Strong Buy Looking to major video game company Electronic Arts, the analyst noted that the company is expected to “modestly” beat its second quarter guidance, and “slightly” increases its guidance for the third quarter. “We expect EA to report Q2 results in line with our estimates for revenue of $700 million and EPS of $0.04, excluding $0.23/share in charges. This compares with the consensus estimates for revenues of $672 million and EPS of $0.02 (excluding charges) and company guidance for revenue of $635 – 685 million and EPS of breakeven (excluding $0.25 in charges primarily for stock based comp and acquisition),” wrote Pachter. EA earlier reported “stronger than expected” performance for the quarter ended September 30, with U.S. retail sales of $421 million. The company's revenue guidance is between $635 – 685 million, while its guidance for all of fiscal 2007 calls for revenues between $2.8 – 3.0 billion, a figure that Wedbush feels is “conservative.” The firm is maintaining EA's stock as a Strong Buy with a $60 target price. Shares of EA are currently trading at $53.66. Pachter wrote: “Full-year guidance was based upon the company’s estimate for flat to negative 5% industry growth. It now appears that the industry will grow between 5 – 8% in 2006, with approximately 8 – 10% growth in the December quarter. Accordingly, we believe that EA is likely to deliver substantial upside to revenue estimates in its December quarter. Our earnings estimates again reflect significantly higher year-over-year marketing expenses, as we believe EA will continue to support its sports franchises during the holiday quarter. We note that EA has several games planned for Q4 release, and the delay of any of these could result in revenues and EPS at the high end of guidance for the full year. On balance, we expect at least one game to shift from Q4:07 to Q1:08, and expect EA to maintain its full year EPS guidance.” Midway - Hold Concerning publisher Midway Games, the firm expects Midway to report revenues of $26 million for its third quarter. The publisher announced guidance of revenues of $24 million and a net loss of $23 million, although according to Wedbush, Midway’s retail sales in the U.S. are up 13% compared to the same period a year ago, which Pachter noted could mean that guidance “may be too conservative.” However, he added that, due to the “relatively light performance” of recent Midway releases at retail, a “significant upside” to the firm's estimates is unlikely. Wedbush anticipates Midway to remain cautious as continue to invest in its future for the remainder of 2006 and into 2007. “Although we believe that Midway has reached the low point in its turnaround story, we have no clear visibility as to when it will achieve profitability,” wrote Pachter. Wedbush currently classifies Midway's stock as Hold, with a 12-month target price of $8.44. Shares of Midway are currently trading at $8.66. He added: “The company’s cost structure suggests that it can achieve profitability at revenue levels of $300 million annually, and we remain confident that Midway will be able to generate revenues at the $300 – 800 million level over the next several years. However, to achieve this level of revenues, the company must continue to expend resources on growing its development capability.” THQ - Buy Finally, looking to THQ, Wedbush expects the publisher to report second quarter results “in line with or above our estimates for revenue of $205 million and EPS of $0.04, excluding $0.04/share in option expense.” THQ’s NPD U.S. retail sales for the second quarter were up a substantial 63 percent for the previous year, while guidance placed sales up just 37 percent. The firm has maintained THQ's stock rating as Buy, with a target price of $31. THQ is currently trading for $29.40. “We believe that continued strong sales of Cars as well as strong sales of its new release Saints Row drove strong sales strength,” commented Pachter. “It is likely that the company generated upside to our estimate, and we expect strong reorders to drive further growth in Q3.” Looking ahead to THQ's fiscal 2007 performance, Pachter added: “We expect THQ to remain upbeat about the company’s prospects for FY:07. We expect management to raise the low end of its FY:07 guidance (currently for revenue of $900 – 950 million and EPS of $0.90 – 1.00 (excluding $0.16/share in options expense)). Although we are confident that full-year industry growth will be substantially higher than the assumptions used in arriving at both guidance and the consensus estimates, we note that THQ has two high-profile PC games (S.T.A.L.K.E.R. and Supreme Commander) scheduled for release in the March quarter, and we believe that one or both may slip into the following quarter. Should that occur, we believe that full year EPS is likely to be at the high end of the company’s guidance range.”