Nintendo Shares Should Continue To Soar

As a regular viewer of Jim Cramer’s Mad Money show, I was surprised when he stated on his November 17, 2006 show: “You can’t play the Wii by buying Nintendo because it doesn’t even trade here.” That statement is not correct.

Since February 2006 people have been able to buy Nintendo American Depositary Receipts [ADRs] (NTDOY.PK) on the pink sheets market. A total of 50 million NTDOY shares were registered with the SEC in February 2006. JP Morgan Chase is the depositary and eight (8) NTDOY shares equal one (1) Nintendo Japan share. The intrinsic value of a share of NTDOY can be calculated by converting the yen price of a share of Nintendo stock as quoted on the Tokyo Stock Exchange into dollars and then dividing by eight (8). It should be noted that Japan is 14 hours ahead of the United States; therefore, Tokyo trading generally dictates the price of NTDOY.

I am an avid gamer, investor, and a big fan of Nintendo. I own NTDOY shares and believe that everyone who buys a Nintendo Wii or DS Lite should consider buying NTDOY shares. I am convinced that the profit they will earn as shareholders will dwarf the cost of their consoles and games.

On February 21, 2007 NTDOY closed at $33.80, whereas Nintendo Japan closed on the Toyko Stock Exchange at 31,400 Yen. At those prices, Nintendo has a reported PE of 29.8 and a dividend yield of 1.25%.

Nintendo’s fiscal year ends March 31. In a recent (January 25, 2007) earnings release (.pdf) Nintendo management announced impressive nine-month results for the period ended December 31, 2006. It stated that both “Nintendo DS” hardware and software recorded very strong sales for the nine month period ended December 31, 2006. “Nintendo DS” hardware has been the fastest rising game platform ever in the Japan market, and, in addition, has sold well in overseas markets. As a result, sales in the first three quarters have reached 18.88 million units on a worldwide basis. As for ” Nintendo DS” software, net sales have also accelerated, supported by a number of millon-seller titles. Sales have been led by “New Super Mario Bros.”, with 8.64 million units sold on a worldwide basis and continuing strong sales of “Touch! Generations” titles such as “Brain Age: Train Your Brain in Minutes a Day!” and “Nintendogs”. In the console business, “Wii” hardware (launched at the end of last year) got off to a favorable start and “Wii” softwaretitles such as “The Legend of Zelda : Twilight Princess” enjoyed brisk sales as well.

As a result, net sales rose to 712.5 billion yen (72.8% up y/y), causing operating income to reach 167.6 billion yen (102.5% up y/y) despite a rise in selling, general, and administrative expenses, which was primarily driven by higher marketing expenses. Income before income taxes and extraordinary items was 220.7 billion yen (50.5% up y/y) primarily due to 26.0 billion yen (45.2 billion yen last nine-month period) of foreign exchange gains. Net income reached 131.9 billion yen exceeding last year by 43.1%.

Importantly, Nintendo has a stated dividend policy of distributing the higher of the amount calculated by dividing 33% of consolidated operating income by the total number of outstanding shares, excluding treasury stock, as of March 31, 2007 rounded up to the 10 yen digit, or the amount calculated based on the 50% consolidated net income standard rounded up to the 10 yen digit. Based on this policy, the year-end dividend per share and the annual dividend per share are expected to be 410 yen and 480 yen, respectively. The ex-dividend date for the year-end dividend will be in March.

Unlike Sony with its PS3 and Microsoft with its XBox, Nintendo offers a pure play on a widely heralded new game product and has said it will make a profit on its Wii console sales. Nintendo says it will ship 4 million Wii units before the end of 2006. Importantly, most of Nintendo’s biggest selling titles like “Legend of Zelda” and “Super Mario Brothers” are proprietary.

The trading volume in NTDOY has been rising as more people discover they can buy shares in Nintendo and for the past 10 trading days the average daily volume according to eTrade has been 356,824 shares.

Daily quote: On Friday, February 22nd Nintendo closed at 33,800 yen on the Tokyo Stock Exchange. That was up 1,400 yen or 4.32% from the previous day's close. As of 9 AM New York time, the U.S. dollar is trading at 121.326. Accordingly, the intrinsic value of NTDOY at beginning of Friday's trading in New York is $34.82.

Disclosure: Author is long NTDOY.PK

NTDOY.PK 1-yr chart:

Comments

[akindman:]

Beware buying the ADR today, the announcement that 1.4% of Nintendo shares are being dumped back on the market came after market close in Japan.

2007 Feb 23 12:20 PM

[David Lentz:]

According to Reuters, "The tentative selling price will be set at 90-100 percent of the closing price on one day between March 5 and March 8."

1.4% of the 50 million ADR shares is 700,000 shrs, as compared to the average daily volume of 172,670 shrs. A week or two should wash away the effects of the government sale of shrs.

So between now and shortly after whenever the sale takes place should be a good buying opportunity.

Nintendo products (Wii, DS) continue to sell like gangbusters, with a shelf half-life measured in seconds. At the rate they're going, they will sell more Wii's in 2007 than Microsoft will sell Xbox360's and Sony will sell PS3's combined. And unlike Microsoft and Sony, Nintendo makes profit on every Wii or DS that they sell.

Yeah, I own NTDOY.

2007 Feb 24 09:48 AM

[matthew riva:]

Wow! I am a HUGE Nintendo gamer and dabble in trading stocks, and have always wondered if you could buy Nintendo stock here in the US. Thank you for posting such great information on NTDOY. I too believe Nintedno is ready to break all kinds of records in the gamer world. They are reaching all kinds of new people outside the so-called "gamer world", like my mom for instance, she just bought a DS lite for sudoku and Big-Brain Academy. My nephew who is 5 loves Animal-crossing. When I bought my Wii last weekend the buzz in the air was palpaple. It was 3 degrees on Feb 11th and it felt like X-mas. Below are my thoughts on the WII's future.
One stop Shop
I think the Wii can be used as both video game console and COMPUTER. Now that it offers WII news, weather and internet it can easily be used as a computer and for only $250 bucks. Even if someone wanted it just for e-mail, it still would be a great buy.
WIi software
The are some issues with WII in that it lacks a lot of good games(but what new console does, remember the XBOX), but it has its share and compared to PS3 (which basically has nothing) it has a lot. It took developers a while to get the games right for the DS and now it boasts an awesome library of creative and innovative games for everyone from hard core gamer, little kids, grandparents and everyone in between. Obviously, the same thing will happen to the WII in no time.
Also, the concept of Nintendo's virtual console games is another brilliant move. Every Nintendo fan will buy a at least a few games and if you buy Wii points in a retail store you HAVE to buy at least $20 worth and most of this is PURE PROFIT that goes straight to the bottom line.
Nintendo's strategy of slowly rolling new options to the WII like news, internet and next will be Inline play is pure genious. I believe in the next few years they upgrade the wii to High-Def, just like they slowly upgraded the DS.
Nintendoman please continue to post as you seem to know how to crunch the numbers and spot buying opportunities.
And yes I am LONG NTDOY. Did I mention that I love the Dividend
Landman76

2007 Feb 27 01:19 AM