The naysayers who last year predicted that entertainment software company THQ Inc. couldn’t keep up its spectacular growth without a key line of wrestling games have been put in a headlock.
At the time, the World Championship Wrestling games accounted for more than half of THQ’s revenue. The stock price plunged 24 percent on the day it was announced that the WCW agreement would not be renewed.
But in the past three weeks, THQ shares have jumped 36 percent on the strength of estimates that its third-quarter revenue will increase by nearly 100 percent from a year ago even though this is the first quarter the company has had no WCW titles.
Late last week, Calabasas-based THQ was at around $42.50 a share, well up from around $31.25 in early September. Some analysts are predicting the shares could go much higher.
“I think the stock’s going to $60, and we could see that by Christmas,” said Robert Delean, an analyst at Morgan Keegan in Memphis.
Delean and other analysts estimate that revenues for the third quarter ended Sept. 30 could be somewhere between $45 million and $50 million, well up from $26 million for the like period a year ago. With a price-to-earnings ratio of around 18, the stock has room to move upward, and several analysts have rated THQ as a “buy” or “strong buy.”
“I see no reason why not to buy the stock at its current levels,” said Edward Williams, an analyst at Gerard Klauer Mattison in New York.
For the second quarter ended June 30, net income was $4.1 million (32 cents a share), compared with a net loss of $4.7 million (42 cents) for the like period a year ago. For the year ended Dec. 31, 1998, net income was $16 million ($1.38), up from $9.3 million (90 cents) the previous year.
Even without wrestling, the company is well positioned to take advantage of the continued boom in the video game market. With around 25 million Sony Playstations and perhaps 13 million Nintendo 64 units sold in the U.S, the demand for games is huge.
THQ games include various titles based on the hit “Rugrats” TV show and movie, and the German and Swiss rights for titles related to “Star Wars Episode One: The Phantom Menace.” Recent releases like “Championship Motocross” endorsed by racing star Ricky Carmichael and the racing game “Road Rash” have flown off the shelves. The company also sells family-friendly games based on sports like bowling and fishing.
“It looks as if investors came back from Labor Day and realized that the holiday season is going to be a strong one,” said THQ Chief Executive Brian J. Farrell. “It is satisfying to us. We told the investment community that our company wasn’t only about wrestling.”
Farrell, who said he is “comfortable” with analysts’ third-quarter revenue estimates, noted that the holiday season shapes up to be quite profitable, thanks in part to the lowering of the price for Playstation and Nintendo 64 units to $99. The more hardware sold, the more software needed.
He acknowledges that the loss of WCW leaves a big hole. The company’s “WCW Revenge” is still THQ’s all-time bestseller, having sold somewhere between 1.5 million and 2 million units. But soon after ending the agreement with the WCW, THQ and joint venture partner Jakks Pacific Inc. announced a 10-year pact to publish World Wrestling Federation games. The first title will be on sale in November, in time for the Christmas rush.
Farrell thinks the WWF games should sell as well, if not better, than the WCW games, and analysts agree, given that of the two pro wrestling circuits, the WWF is currently more popular.
“Look at the television ratings for WWF versus WCW,” Delean said. “WWF ratings are often twice what WCW’s are.”
THQ recently signed an agreement with Sega Enterprises Ltd. to publish games for the new Dreamcast system, which sold more than half a million units in the first two weeks of its introduction in early September. While the bandwidth isn’t yet available to play games over the Internet, THQ is looking at ways to make its games available for that market, which Farrell expects to be a reality by 2001 or 2002.
“The execution of their business plan has been solid, and their product line is great,” Williams said. “And we’re hitting the peak time of the year.”
THQ Inc. (Year ending Dec. 31)
1998 1997
Sales (millions) $215.1 $89.4
Operating Expenses (millions) $190.6 $78.5
Operating Income (millions) $24.5 $10.8
Net Income (millions) $16.0 $9.3
Earnings Per Share $1.38 $0.90
Business: Home video games
Headquarters: Calabasas
CEO: Brian J. Farrell
Market Capitalization: $513.1 million
Dividend Yield: N/A*
P/E Ratio: 18.72
Long-Term Debt: $0
*THQ does not pay dividends
