THQ Raises Fiscal 3Q07 Guidance: Stock May Be Negatively Affected

| About: THQ, Inc. (THQIQ)

A roundup of recent news relating to game console maker THQ (THQI):

  • THQ (THQI) raised its guidance for fiscal 3Q07 and fiscal 2007. THQ pre-released stronger-than-expected fiscal 3Q07 results, due to strong holiday sales. The company is now looking for fiscal 3Q07 revenue of $475 million versus previous guidance of $400 million to $425 million and GAAP EPS of $0.91 versus previous guidance of GAAP EPS of $0.65 to $0.70.
  • Upside came from a strong release slate and a positive Fx impact. Management credited upside to sales of mass market franchise titles including WWE Smackdown vs. Raw 2007!, Cars and Avatar: The Last Airbender. We also believe THQ benefited from a weaker dollar as WWE and Cars are strong sellers in the U.K. and Europe.
  • New guidance for fiscal 4Q07 is at the low end of previous guidance. Revenue is now expected to be $146 million, down from $145 million to $170 million, and GAAP EPS are now expected to be $0.09 versus previous guidance of $0.17 to $0.22. This downward revision was attributed to the delay of an unannounced PS3 title to fiscal 1Q08.
  • For fiscal 2007, THQ expects $1 billion in revenue and GAAP EPS of $1.00. This compares to previous guidance of $925 million to $975 million and GAAP EPS of $0.77 to $0.87. If THQ is able to attain this goal, the company will have reported a 24% increase in revenue over fiscal 2005, which compares to our forecast for growth in total industry sales of 16%.
  • We are updating our estimates to reflect improved guidance. We now expect fiscal 3Q07 revenue of $475 million and GAAP EPS of $0.91. For fiscal 4Q07, we look for revenue slightly above guidance at $152 million and GAAP EPS of $0.09. For fiscal 2007, we look for revenue of $1.006 billion and GAAP EPS of $1.01 pretty much in line with guidance.
  • We are raising our price target to $34 from $28. We value shares of THQI at $34 based on 19.7x 2009 FCF of $137 million discounted to present at 11.25%. Our price target is still based on a fiscal 2007 PV, implying the potential for upside over the next 12 months. However, at current levels we believe upside in fiscal 2007 is now fully priced into the stock.
  • THQ must now generate upside from stellar performance in fiscal 2007. THQ has had an impressive year thus far outperforming most of its peers in fiscal 2007, which raises the bar significantly for fiscal 2008. Our preliminary analysis of THQ's fiscal 2008 line-up indicates that upside to fiscal 2007 results will largely need to come from new and unproven franchises.
  • We would view investment in THQI as moderately risky. We believe the primary risk to our neutral thesis is that THQI will continue to rise as investors search what appears to be an overbought market for the illusive growth idea. We believe this puts a negative bias in the stock whereby the slightest disappointment could put pressure on the stock.