Analysts boost THQ's stock rating

All expect Incredibles publisher's stock to outperform the market, following Q3 '05 earnings report; predict revenues up to $1 billion in FY07.

Soundly impressed by THQ's third-quarter balance sheet, industry analysts are giving the company's stocks an enthusiastic push--and predicting that the Incredibles publisher would make close to $1 billion in fiscal year 2007.

Analysts with Wedbush Morgan Securities, Piper Jaffray, and TerraNova all agreed that THQ's stock (THQI) is one to buy--pronto. Share prices finished yesterday at $22.86, but after-hours trading brought them to more than $27; this morning's high price was $28.86. All three firms agreed the stock price would continue to climb, most likely into the $34 to $37 range over the long term.

"Stated in direct terms, we were completely wrong about THQ's holiday quarter, and about its ability to grow going forward. On several occasions, we had expressed skepticism that the company could deliver sales growth in line with guidance, and we were clearly mistaken," said Wedbush Morgan analyst Michael Pachter in a report, entitled "Destroy All Estimates!," released this morning. "THQ's balance sheet is in great shape. The company ended the quarter with $211 million in cash...and no debt."

Through more conservative phrasing, TerraNova analyst Boris Markovich also showed enthusiasm for the game company's prospects. "We would aggressively accumulate THQI under $30 and like the stock for longer-term investors up to $34," he said in a report issued today. "We are increasing our FY07 estimates to $1 billion in revenue, up from $785 million." Pachter put the number at closer to $950 million. THQ anticipates net sales of approximately $750 million for the fiscal year 2005, which ends March 31. Its net sales were $680 million in fiscal year 2004.

Markovich based his estimate, in part, on Disney and Pixar's plans to release its next film, Cars, in fiscal year 2007. Some of THQ's most popular cross-platform games have been based on previous Disney/Pixar outings, including The Incredibles and Finding Nemo. The company is planning a Cars-based game, likely in conjunction with the release of the film. Sales of the first Incredibles game vastly outpaced even the popular Finding Nemo: THQ sold 4 million units of the Incredibles, while Finding Nemo sold 2.5 million, and the newer game sold as many copies in its first nine weeks as Nemo did in its first seven-and-a-half months.

Other up-and-coming titles for THQ include a second Incredibles game, Juiced, WWE WrestleMania XXI, Destroy All Humans!, and new versions of titles licensed with Nickelodeon.

Piper Jaffray analyst Anthony Gikas upgraded his THQI rating to "outperform" in a report released today. "Both sales and earnings per share outpaced our and the Street estimate." But he cautioned, "We expect FY06 to be a soft and choppy year, followed by solid growth in FY07."

For Markovich, the biggest potential fly in the ointment was a lawsuit between the WWE and Jakks over the WWE license. Because THQ is a defendant in the case, and the WWE franchise brings in about 20 percent of the game company's revenue, losing the license could be a serious setback.

Pachter cited other concerns, such as changes to game-release timing, a quicker deterioration of game prices, the effects of competition, and slower demand for game hardware, as items that could mar THQ's rosy forecast. However, he added that he expects the 2005 holiday season to be substantially less competitive than 2004's.

"THQ...is to be commended," Pachter added. "The company was able to grow market share in the face of tremendous competition, producing popular games that did very well in a difficult market environment."

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