http://seekingalpha.com/article/131532-nintendo-is-a-game-winner-barron-s
Nintendo's (NTDOY.PK) shares have taken a beating over the past year, but the drop seems overdone, writes Barron's Jay Palmer. The stock now looks like a bargain, especially considering profits could jump 40% this year.
The company's most recent home game console, the Wii, has sold 10M units in the U.S. and 50M units worldwide, far more than its rivals. The latest version of Nintendo's DS handheld game player became the most pre-ordered game console in history before its introduction this month.
One reason the stock has tumbled recently, despite the strong sales, is because Nintendo cut its guidance for fiscal year 2009, which ended in March. It projected an operating profit of $5.3B vs. expectations of $6.3B, though some think the company will still exceed its own projections. The company has become more conservative in its projection of Wii sales (though more optimistic about sales of the new DS). A strong yen makes consoles less price-competitive in the U.S. and Europe, while cutting into the value of overseas earnings. Investors were also surprised that Nintendo had been outsold by rival Sony (SNE) in Japan in March.
Worries over falling videogame demand in Japan have been overblown. Though January-February sales of videogame software and hardware rose 'only' 11% Y/Y in Japan, many analysts have overlooked Nintendo's bright prospects in the ex-Japan markets which produce 81% of total sales. Videogame sales remain strong in the West, with U.S. sales rising 11% from October through February despite the recession. Reggie Fils-Aime, CEO of Nintendo's U.S. unit, noted "the total industry has grown just over $1B during that time frame. Nintendo has grown over $3B. So do the math."
Nintendo has a strong balance sheet, with $9.5B in cash vs. $4.3B in debt, and pays an annual dividend of $1.58 per ADR. The company has the financial flexibility to buy back stock or raise dividend payments. Strong growth should resume in the second half of the year, and profits could jump 45% for the year.
Nintendo's American depositary receipts closed at $33.10 on Friday.
- Michael Pachter, a Wedbush Morgan Securities analyst, says "when you look at the underlying numbers, no company globally is performing better than Nintendo." Pachter has a twelve-month target of around $60 for the ADRs.
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- In January, Nintendo's Wii became the first console to sell 10M units in the U.S. in one year - representing 55% of all console sales.
- Deutsche Bank tagged the stock with a Sell rating last month, saying profits will peak in early 2010, and fall thereafter. "Sales are brisk in Europe and the U.S., but we see a risk of an early fall if content remains unchanged."
