netrashetty
Netra Shetty
THQ Inc. (NASDAQ: THQI) is a developer and publisher of video games. Founded in 1989 in the United States, the company develops products for video game consoles, handheld game systems, as well as for personal computers and wireless devices. THQ has offices in North America, Europe and Asia Pacific.
The company publishes internally created and externally licensed content in its product portfolio. THQ's internally created franchises include Saints Row, Frontlines: Fuel of War, Red Faction, MX vs. ATV, Company of Heroes and others. The company also holds exclusive, long-term licensing agreements with leading sports and entertainment content creators including World Wrestling Entertainment (WWE), Games Workshop (Warhammer 40,000), Ultimate Fighting Championship (UFC), Nickelodeon and Disney-Pixar. It has announced net sales of $830.0 million in 2008, down from $1,030.5 million in the year previous. Net losses were $431 million for the 12 months ending March 2009, down from $35.3 million in the year previous.
The Software and Programming Industry is a large, but risky area for investments. With large-cap giants such as Microsoft and Oracle to more controversial small-cap start-ups, there is a lot of potential to make capital gains. In between these two extremes come the one to five billion dollar mid-cap companies in this industry. Companies like Ansys, Sybase, and Micros Systems, while unrecognizable to the general consumer, have helped investors obtain high portfolio profits. Another company in this range, THQ Inc (THQI), has also done well for investors over the past five years. However, the difference between THQ and these other mid-caps is the strength of its business plan and solid historical and future fundamentals.
Before trying to understand the fundamentals, it is always important to figure out what the company does. In the case of THQ, the company, according to Reuters, "is a worldwide developer and publisher of interactive entertainment software for all game systems." Some of these systems include the new-generation consoles such as Microsoft's XBOX 360, Sony's PlayStation 3, and Nintendo's Wii. With the increased popularity of video games in the past decade, having a company that produces the software for these systems is a good investment. What makes THQ more enticing is what kind of games it produces. It seems that THQ is very family-friendly with its product, as it owns licenses from giants such as Disney and Nickelodeon. Creating games based on shows such as SpongeBob SquarePants and Finding Nemo attracts the more casual gamer, as well as the younger audience. As Nintendo's Wii is strongly supportive of the aforementioned demographics, such software titles are a great addition to the strange-named console which is actually also strongly outselling its Japanese counterpart (Sony) in both North America and Japan. In addition, because the Wii is also much cheaper than either the XBOX 360 or PS3, the younger generation will be more inclined to purchase this system and subsequently buy the appropriate software created by THQ. Nevertheless, some investors may claim that the hardcore gamer is not inclined to purchase these games, because of its childish appeal. However, the younger demographic is a huge concentration of the market, and because of such familiar brand-names, even the most involved gamer may still desire to purchase something recognizable to him or her. This theory has recently worked well for THQ, as only once in the past five-calendar years has the company failed to increase share price wise, growing nearly 25% in 2006. Thus, as long as THQ continues to utilize the same types of brands and Nintendo continues to sell in egregious amounts, this company should continues to see increasing sales and strong support for further share price appreciation.
However, while the given plan is great, there are other companies such as Activision and Microsoft which have similar business models. The real enticement from THQ comes from its fundamentals. As a $2.05 billion dollar company, THQ has seen annual revenue of about $1.03 billion over the past twelve months, according to Reuters. This number, compared to industry-rivals Ansys, Sybase, and Micros Systems is not only significantly higher, but explains the reasoning for THQ's below-industry margins. With a trailing gross margin of 65.77% and a similar trailing operating margin of 7.62% compared to the respective industry averages of 75.73% and 25.87%, there may be some concern regarding growth for THQ. However, upon close examination of these numbers, the benefit clearly lies with THQ. Looking at Ansys and its $305.49 million revenue and its trailing 77.50% gross margin, it is palpable that with trailing revenue nearly three times lower than THQ, margins should be significantly higher for Ansys. However, this is not the case, and even more disturbing to Ansys is the drop-off percentage wise in gross and operating margins (14.78%) over the past year compared to the respective five year averages of 26.08% and 82.02%. In addition, another competitor, Micros Systems, which has revenue trailing at $678.95 million, also astonishingly has seen gross margins grow at 51.97% and operating margins at 13.71%. Furthermore, looking at only sales (27.31%) and EPS (98.03%) growth over the past year, compared to respective industry averages (19.78% and 15.57%) and the aforementioned competitors, THQ significantly towers these figures, illustrating a strong potential for growth. Despite being below industry averages, THQ, with its high revenue, has done fairly well relative to margin growth, especially compared to its industry competitors.
Moreover, THQ is relatively undervalued compared to the industry as well. According to Reuters, its forward P/E ratio of 22.00 for 2008 is below the industry average of 28.24 and below most of the forward multiples of its industrial rivals (Ansys: 24.93, Sybase: 14.72, and Micros Systems: 22.43). In addition, with projected revenue of $1.14 billion in 2008, its price to sales of 1.85 and enterprise value to revenue of 1.40 during this duration is also quite cheap (Ansys: 5.14 and 4.94, Sybase: 2.15 and 1.90, and Micros Systems: 2.64 and 2.17). As THQ is also producing quite a bit of cash, its price to cash flow of 7.91 is below industry averages as well. Overall, the valuations, while not unbelievable, are still quite favorable for future price growth, especially considering the aforementioned sales and EPS growth rates.
Furthermore, other areas of THQ's business look strong as well. Trailing ROE at 9.30% which is above or near competitors' averages illustrate that CEO Brian Farrell and his 2000 employees are taking care of shareholder equity. THQ is also very solvent with a current ratio of 3.85 in its most recent quarter compared to the industry at 2.10. In addition, the debt level for this company is astonishing low, as it had no debt whatsoever in its most recent quarter which cannot be said for any of the three companies mentioned. Receivable Turnover (14.02), Asset Turnover (1.10) and Inventory Turnover (12.55) are all above industry averages, meaning THQ works very efficiently. And most importantly is the PEG ratio of 1.19 for THQ which is not only below the aforementioned rivals figure, but is an indicator illustrating both strong growth and undervalued status for this company. This number is strong basis for the entire argument presented for why THQ is a great company to hold.
There is no question that THQ is an intrinsically strong company with many historical and future appeals. And while this company would be an excellent equity for any portfolio in the long term, in the short run, now would be an excellent time to purchase some shares. The company is trading below its 50 and 200 day SMA coupled with a parabolic SAR signaling an undervalued market. The RSI at 30 is very near 20--the oversold status, and all other leading oscillators gesture a strong potential for a technical share price rise. Given this information as well as the fundamental and business analysis, any investor should see the immense amount of positive information THQ has to offer.
The company publishes internally created and externally licensed content in its product portfolio. THQ's internally created franchises include Saints Row, Frontlines: Fuel of War, Red Faction, MX vs. ATV, Company of Heroes and others. The company also holds exclusive, long-term licensing agreements with leading sports and entertainment content creators including World Wrestling Entertainment (WWE), Games Workshop (Warhammer 40,000), Ultimate Fighting Championship (UFC), Nickelodeon and Disney-Pixar. It has announced net sales of $830.0 million in 2008, down from $1,030.5 million in the year previous. Net losses were $431 million for the 12 months ending March 2009, down from $35.3 million in the year previous.
The Software and Programming Industry is a large, but risky area for investments. With large-cap giants such as Microsoft and Oracle to more controversial small-cap start-ups, there is a lot of potential to make capital gains. In between these two extremes come the one to five billion dollar mid-cap companies in this industry. Companies like Ansys, Sybase, and Micros Systems, while unrecognizable to the general consumer, have helped investors obtain high portfolio profits. Another company in this range, THQ Inc (THQI), has also done well for investors over the past five years. However, the difference between THQ and these other mid-caps is the strength of its business plan and solid historical and future fundamentals.
Before trying to understand the fundamentals, it is always important to figure out what the company does. In the case of THQ, the company, according to Reuters, "is a worldwide developer and publisher of interactive entertainment software for all game systems." Some of these systems include the new-generation consoles such as Microsoft's XBOX 360, Sony's PlayStation 3, and Nintendo's Wii. With the increased popularity of video games in the past decade, having a company that produces the software for these systems is a good investment. What makes THQ more enticing is what kind of games it produces. It seems that THQ is very family-friendly with its product, as it owns licenses from giants such as Disney and Nickelodeon. Creating games based on shows such as SpongeBob SquarePants and Finding Nemo attracts the more casual gamer, as well as the younger audience. As Nintendo's Wii is strongly supportive of the aforementioned demographics, such software titles are a great addition to the strange-named console which is actually also strongly outselling its Japanese counterpart (Sony) in both North America and Japan. In addition, because the Wii is also much cheaper than either the XBOX 360 or PS3, the younger generation will be more inclined to purchase this system and subsequently buy the appropriate software created by THQ. Nevertheless, some investors may claim that the hardcore gamer is not inclined to purchase these games, because of its childish appeal. However, the younger demographic is a huge concentration of the market, and because of such familiar brand-names, even the most involved gamer may still desire to purchase something recognizable to him or her. This theory has recently worked well for THQ, as only once in the past five-calendar years has the company failed to increase share price wise, growing nearly 25% in 2006. Thus, as long as THQ continues to utilize the same types of brands and Nintendo continues to sell in egregious amounts, this company should continues to see increasing sales and strong support for further share price appreciation.
However, while the given plan is great, there are other companies such as Activision and Microsoft which have similar business models. The real enticement from THQ comes from its fundamentals. As a $2.05 billion dollar company, THQ has seen annual revenue of about $1.03 billion over the past twelve months, according to Reuters. This number, compared to industry-rivals Ansys, Sybase, and Micros Systems is not only significantly higher, but explains the reasoning for THQ's below-industry margins. With a trailing gross margin of 65.77% and a similar trailing operating margin of 7.62% compared to the respective industry averages of 75.73% and 25.87%, there may be some concern regarding growth for THQ. However, upon close examination of these numbers, the benefit clearly lies with THQ. Looking at Ansys and its $305.49 million revenue and its trailing 77.50% gross margin, it is palpable that with trailing revenue nearly three times lower than THQ, margins should be significantly higher for Ansys. However, this is not the case, and even more disturbing to Ansys is the drop-off percentage wise in gross and operating margins (14.78%) over the past year compared to the respective five year averages of 26.08% and 82.02%. In addition, another competitor, Micros Systems, which has revenue trailing at $678.95 million, also astonishingly has seen gross margins grow at 51.97% and operating margins at 13.71%. Furthermore, looking at only sales (27.31%) and EPS (98.03%) growth over the past year, compared to respective industry averages (19.78% and 15.57%) and the aforementioned competitors, THQ significantly towers these figures, illustrating a strong potential for growth. Despite being below industry averages, THQ, with its high revenue, has done fairly well relative to margin growth, especially compared to its industry competitors.
Moreover, THQ is relatively undervalued compared to the industry as well. According to Reuters, its forward P/E ratio of 22.00 for 2008 is below the industry average of 28.24 and below most of the forward multiples of its industrial rivals (Ansys: 24.93, Sybase: 14.72, and Micros Systems: 22.43). In addition, with projected revenue of $1.14 billion in 2008, its price to sales of 1.85 and enterprise value to revenue of 1.40 during this duration is also quite cheap (Ansys: 5.14 and 4.94, Sybase: 2.15 and 1.90, and Micros Systems: 2.64 and 2.17). As THQ is also producing quite a bit of cash, its price to cash flow of 7.91 is below industry averages as well. Overall, the valuations, while not unbelievable, are still quite favorable for future price growth, especially considering the aforementioned sales and EPS growth rates.
Furthermore, other areas of THQ's business look strong as well. Trailing ROE at 9.30% which is above or near competitors' averages illustrate that CEO Brian Farrell and his 2000 employees are taking care of shareholder equity. THQ is also very solvent with a current ratio of 3.85 in its most recent quarter compared to the industry at 2.10. In addition, the debt level for this company is astonishing low, as it had no debt whatsoever in its most recent quarter which cannot be said for any of the three companies mentioned. Receivable Turnover (14.02), Asset Turnover (1.10) and Inventory Turnover (12.55) are all above industry averages, meaning THQ works very efficiently. And most importantly is the PEG ratio of 1.19 for THQ which is not only below the aforementioned rivals figure, but is an indicator illustrating both strong growth and undervalued status for this company. This number is strong basis for the entire argument presented for why THQ is a great company to hold.
There is no question that THQ is an intrinsically strong company with many historical and future appeals. And while this company would be an excellent equity for any portfolio in the long term, in the short run, now would be an excellent time to purchase some shares. The company is trading below its 50 and 200 day SMA coupled with a parabolic SAR signaling an undervalued market. The RSI at 30 is very near 20--the oversold status, and all other leading oscillators gesture a strong potential for a technical share price rise. Given this information as well as the fundamental and business analysis, any investor should see the immense amount of positive information THQ has to offer.