Analysts 'optimistic' on THQ rebound

Janco Partners' Mike Hickey and EEDAR's Jesse Divnich believe UFC, Red Faction publisher will reverse fortunes this year; stock price hits eight-month high.

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Gaming executives are among the first to be upbeat about their company's future prospects, even if those rosy projections are made from within a house that is clearly on fire. Such was the case with THQ president and CEO Brian Farrell, who last month had the dubious honors of putting a positive spin on the publisher's dismal fiscal 2008 performance in which the company lost $431 million and eliminated some 24 percent of its global workforce.

THQ may have struck gold with Red Faction.
THQ may have struck gold with Red Faction.

"We have taken decisive actions to achieve our cost saving objectives, eliminating $220 million in cash expenditures while at the same time implementing a focused product strategy," Farrell said. "We are investing in the brands and products with the highest potential to drive THQ's long-term profitable growth." That strategy entails realigning THQ's product portfolio under the precepts of quality over quantity, as well as halving its yearly core game slate.

Now, analysts seem to be brightening on THQ's potential of recovering from the setbacks it experienced in 2008. In a note to investors today, Janco Partners' Mike Hickey upgraded THQ's stock to "Buy," saying that while profitability remains uncertain, the publisher is poised to build revenues in the coming fiscal year.

"We are increasingly more optimistic on the company's near term financial prospects as our focus shifts from near term liquidity concerns to their upcoming game pipeline where buzz is beginning to build," Hickey said. "Management continues to rebuild credibility through execution on planned cost cutting, increased financial transparency, and recent/upcoming product releases including UFC 2009 Undisputed that meaningfully exceeded our initial expectations."

"The Company's games showed reasonably well at E3 and management's analyst presentation drew positive interest from the investment community (27 percent share price increase post meeting)," he continued. "In consideration of their near term sales success, massive cost cutting, strong product showings, and new credit line, we are less concerned on their near-term cash balance and believe there is likely upside to their original fiscal '10 sales guidance."

Electronic Entertainment Design and Research's Jesse Divnich was equally upbeat on THQ's future prospects. As part of his monthly retail sales preview issued today, Divnich lauded the release of UFC 2009 Undisputed and Red Faction: Guerrilla, pegging each title to sell a respective 2 million and 1.5 million units by the end of the publisher's fiscal year, which concludes March 31, 2010.

"Most analysts have agreed that THQ would need two successful hits in 2009 to remain profitable, and it looks as if this has been achieved with UFC and Red Faction," Divnich noted.

As of market close on Tuesday, THQ was trading up $0.28 to $8.93 per share, a 3.3 percent climb over yesterday. The closing price marked the highest THQ's stock has been valued at since October 2008.

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