THQ Inc. (THQI) – We expect solid revenue and earnings growth this year in a down market, driven by a strong product release schedule. We also see opportunity for upside to current Street estimates when the company reports 1Q (June) results and updates full-year guidance. In addition, strong consumer reaction to new Nintendo platforms bodes well for THQ.
Cars driving strong start to F2007. Fiscal 2007 is shaping up to be a solid growth year for THQ in a down industry, beginning with the recent successful launch of Cars, the video game based on the Pixar animated film. THQ should also benefit from the August release of Saints Row, which we believe has the potential to be one of the top selling games on the Xbox 360 platform this summer.
Guidance and current estimates likely to prove conservative. We expect THQ to report F1Q results (in late July) in line with or ahead of our estimates, while current expectations for the full year are also likely to prove conservative. We note that the upcoming launches of Nintendo’s Wii and Sony’s PS3 consoles this fall are to be key drivers for rebounding secular growth. Moreover, ramping sales of Nintendo DS handhelds and strong consumer anticipation for Nintendo’s Wii bode well for THQ, which has a leading third-party market share position for Nintendo platforms in North America.
Increasing visibility for market share gains and margin expansion. We believe that, over time, THQ has the potential to gain market share in the next-generation console cycle, and narrow the margin gap with larger publishers through increasing scale and ramping sales from internally owned and developed franchises.
Risks. Aside from near-term issues related to the console transition period, we believe the biggest risks include the rising cost of game development, declining current-generation software ASPs, and the WWE lawsuit. THQ has announced that the SEC investigation into industry accounting practices is closed, with no action taken against the company.
Our price target is $30, derived by applying a multiple range of 20x-25x to our F2010 peak EPS estimate of $1.70, discounted back 12% per year.