Analysts see THQ Inc.’s recent stock plunge as the result of a volatile market reacting to a company doing some housecleaning, rather than a sign of real trouble.
The Agoura Hills-based video game developer’s shares lost a third of their value in January. Late in the month, the company lowered its profit outlook for the third quarter ending in March, canceled two games, scrapped development of two others and closed one of its studios.
“They’re taking a hard look at everything and canceling games that would have come out in 18 months,” said Arvind Bhatia, analyst at Sterne Agee Group, Inc. “They’re taking their medicine early.”
THQ’s shares skidded to $18.01 on Jan. 31. That’s down from $27 on Jan. 2. In its heyday last May, shares had hovered around $37.
“The market has been shaky enough over the past six weeks that investors are not willing to tolerate any uncertainty,” said Michael Pachter, analyst at Wedbush Morgan Securities.
In November, when the company announced it would earn less than expected for the second quarter ending in December, the stocks dropped less than 5 percent. Two months later, “the market is jumping to a conclusion that something is seriously wrong,” he said.
The company now expects to post net income of about 22 cents per share for the third quarter, a steep decline from its earlier forecast of 61 cents per share. Wall Street was expecting net income of 66 cents per share.
The company made $27 million non-cash charge offs by canceling the PlayStation 3 version of “Frontlines” and PlayStation 2
version of “Destroy All Humans”; pulling the plug on unannounced XBox 360 and Play- Station 3 titles scheduled for release in 2010; and shutting down the “Juiced” and “Stuntman” franchises.
‘Damaging factors’
“Two key damaging factors were the cancellations of ‘Juiced’ and ‘Stuntman,'” said Mike Hickey, an analyst at Janco Partners. “But it was clearly the right decision, since the management had already commented earlier that they were not living up to expectations.”
Canceling games in their early stages or halting production of underselling games is not atypical. THQ’s competitor, Activision Inc., also took write-offs on underperforming games five years ago. The stock languished temporarily, but picked up again. The company is now called Activision Blizzard, after Vivendi Blizzard acquired it late last year.
Despite scaling back its outlook, THQ increased its sales guidance for the third quarter to $509 million from $490 million, primarily due to the popularity of its “WWE SmackDown vs. Raw 2008” and “MX vs. ATV Untamed” video games. Wall Street’s expectation was $488 million.
It didn’t help that the company did not host a conference call when it released a less-than-encouraging outlook.
“There was an information vacuum with the company not publicly defending itself. And on the Street, you sell first and ask questions later,” said Pachter. “Over the next few months, we’ll get more information and see that the company is not in big trouble. They took a few missteps and are taking the opportunity to clean things up.”
Company executives declined to comment until an earnings call Feb. 5.
