The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.
Maintaining our OUTPERFORM rating, but raising our 12-month price target to $21 from $19. Our revised price target reflects a forward multiple of ≈ 16x our 2013 EPS estimate of $1.05 plus $4/share in cash. This multiple is in-line with industry peers, and reflects an improving outlook for the video game publishers ahead of the launches of the next generation consoles, likely later this year.
Maintaining our FY:13 estimates, which are significantly above conservative guidance. Maintaining our FY:13 estimates for revenue of $4.74 billion and EPS of $1.05, compared to consensus of $4.27 billion and $0.86, and guidance of $4.175 billion and $0.80. Full year guidance assumes a drop-off for Blizzard revenue, with two releases in 2013 (the first StarCraft II expansion and an unnamed title) expected to significantly underperform 2012’s Diablo III and Mists of Pandaria. In addition, the company expects Call of Duty sales to decline. Guidance does not include Bungie’s Destiny or Call of Duty Online, and we expect modest contribution from each. The company expects the console transition to impact results.
Even if our estimates are too high for 2013, we think they reflect Activision’s (NASDAQ:ATVI) earnings power going forward. Results in 2012 are a good indicator of its true earnings power, and new brands should expand future earnings power further…
We expect Activision Blizzard to provide additional clarity about its long-term operating structure. In its Q4 results press release, the company disclosed that it: “is considering or may consider during 2013, substantial stock repurchases, dividends, acquisitions . . . and significant debt financings relating thereto.” Vivendi’s large ownership stake (62% as of YE) and debt position makes us believe that a tender offer or dividend makes the most sense, as Activision could borrow a significant amount tender for as much as 55 – 60% of its shares, or pay a large dividend instead. We expect volatility for Activision Blizzard shares to persist until Vivendi makes its intentions clear.
We continue to believe that the company has many positive catalysts that could lead to further multiple expansion. These catalysts include: (1) a clearer picture of the company’s future, (2) y-o-y growth from Call of Duty sales (packaged goods and DLC), (3) strong catalog sales of Skylanders Giants toys, (4) a firming up of the 2013 release slate, (5) continued stability for World of Warcraft subs, and (6) continued margin expansion from digital sales.
Michael Pachter is an analyst at Wedbush Securities.
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