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THQ : A Turnaround Story To Buy

THQ is a worldwide developer and publisher of interactive entertainment software for all game systems.

2009-2011 was an awful period for shareholders of THQ, the stock lost 99% of its value and is now a penny stock mainly because of strategic decisions took by the management that didn't work as expected :

- Maintaining investment in the Kids division despite a clear issue with margin their, mainly due to licensing cost.

- Development and build-up of inventory in Udraw, their "drawing tablet" for Game console. That decision almost cost the life of the company as it cost roughly 100M$ in cash due to lack of sales.

- Picking wrong games to spend big marketing money with Homefront as the front running game despite a clear low quality game.

The stock now is a penny stock as the market is pricing bankruptcy also shorts is now betting heavily against the stock which also add pressure (almost 30% of the floating shares are shorted)

The last couple of news ruled out short term bankruptcy and the company will have the time and the money to release all their games as planned.

We also believe that the FY forecast of the company is very conservative and carries a lot of upside potential.

Here is our internal conservative projection on THQ for FY 2013 :

Break-even point : 460 M$

- Catalogue revenue : 80 M$ over the FY 2013

- Darksiders II (august release) : 4,5Munit * 45$ = 202,0M$

- Saint Row 3 : Enter the dominatrix (September release) : 3Munit * 25$ = 75 M$

- WWE (Q3 FY2013) : 2,2Munit * 40$ = 88,0 M$

- Companies of Heroes (Q4 FY2013) = 500kunit * 30$ = 15,0 M$

- Metro Last light (Q4 FY 2013) = 250kunit * 40$ = 10,0 M$

- South Park the game (Q4 FY 2013) = 500kunit * 35$ = 17,5 M$


PROFIT = 37,5M$

We believe the company should be value around 200M$-250M$ with the bankruptcy fears taken out of the table and the huge pipeline of games for the two next fiscal year. In addition to that, THQ is one of a very few list of company that has the potential to release through their studio AAA games. That ability has a great value in the gaming business, a value that should be way above the 40M$ that is now their current market cap.

Conclusion : We would be buyer of THQ with a target of 2-3$ a shares in 12month.

Disclosure: I am long THQI.