Citigroup, Credit Suisse Get Bullish On Video Games

by: Eric Savitz

It was a nice morning Tuesday for investors in video game stocks, thanks to comments from analysts at Citigroup and Credit Suisse.

Citigroup’s Brent Thill made the biggest move, picking up coverage of all four major video game stocks. He starts Electronic Arts (ERTS) and Activision (NASDAQ:ATVI) with Buy ratings, while launching Take-Two Interactive (NASDAQ:TTWO) and THQ (THQI) with Hold ratings. Here are a few details from his calls Tuesday morning:

  • Electronic Arts: Thill set a price target of $75. He says it is the right time of the console cycle to own ERTS; he also says that the new CEO “has set an agenda of change that should yield revenue and EPS growth.”
  • Activision: Price target: $29. Thill sees the company taking market share on leading franchises, and strength in Guitar Hero and James Bond lines; sees the company allocating capital “even more efficiently this cycle,” and says “peak operating margin guidance may prove conservative.”
  • Take-Two: Price target: $23. He describes the stock as a “turnaround play and show-me story.” He does say there are signs of improvement, including bringing in turnaround specialists, a new financially disciplined product strategy and a strong product outlook; but he adds that key risks remain, including dependency on Grand Theft Auto 4, legal and regulatory overhang and a low cash position.
  • THQ: Target price: $34. Thill says that “while the stock is inexpensive and the company is well-positioned for margin expansion and international growth, we prefer other publishers at this point in the console cycle with greater core-gamer revenue concentration.” He also sees intense competition on the Nintendo platform, “traditionally THQ’s stronghold.”

Meanwhile, Credit Suisse’s Heath Terry has positive comments on Activision, while his colleague Gary Balter had some bullish words on video game retailer GameStop (NYSE:GME).

Terry raised his price target on Activision to $28 from $25, “based on expectations for continued momentum in the industry in general, and specifically, Activision’s Guitar Hero and Call of Duty franchises.” For the March 2008 fiscal year, he increased his revenue estimate to $2 billion from $1.89 billion; EPS goes to 62 cents from 56 cents. For 2009, he goes to $2.54 billion and 92 cents from $2.4 billion and 86 cents.

Balter raised his price target on GameStop to $65 from $50, citing “very strong momentum,” strong sales of Microsoft’s (NASDAQ:MSFT) Halo 3 and recent console hardware price cuts.

Balter also makes the case that some holiday spending could shift from conventional toys to video games as a result of the recent spate of recalls of Chinese-produced toys which contain lead-based paint.

“One may get injured playing the Wii due to too much wrist action, or break a TV or two throwing the controller or guitar, but few people we see chew on their controllers,” he writes. “With a potential toy product shortage, this should play to video games advantage.”