Success of core product line keeps THQ near new highs.

Buoyed by strong performances from its trademark game franchises, Calabasas-based video game publisher THQ Inc. has seen its stock reach 52-week highs in recent weeks. THQ's stock had been mired as low as $16.67 in late October before spiking markedly following the company's recent release of its third quarter earnings. As of the close of trading on February 24, THQ stock was valued at $26.79 per share.

In the most recent quarter ended December 31, THQ posted a profit of $62.9 million, or $1.58 a share, up from $30.4 million, or $0.78 a year earlier. THQ's performance far exceeded Wall Street predictions of earnings of $1.15 a share.

THQ's quarterly revenues leaped 37 percent to a record $400.3 million, driven by holiday sales of games that surpassed even the company's own expectations.

For the nine months ended December 31, net income was $52.7 million, compared to profits of $30.4 million in 2003. Revenue grew 13 percent to $584.8 million from $517.7 million for the same period a year ago. THQ Chief Executive Officer, Brian Farrell attributed the success to the performances of the company's core game franchises.

In an industry where the one million seller mark is generally considered the benchmark of success, THQ has had "The Incredibles," "WWE Smackdown! vs. Raw," "Finding Nemo," "SpongeBob SquarePants Movie," "SpongeBob SquarePants: Battle for Bikini Bottom," and "MX Unleashed," all reach that figure in the last year.

"We hit on all cylinders on our core brands last quarter and on some of the new brands that we established. "The Incredibles" video game sold tremendously well and we did over two million units of the "SpongeBob Square Pants Movie" video game, as well as two million units of "WWE Smackdown! Vs. Raw." All of our key franchises performed last quarter," Farrell said.

After the release of the earnings report, several Wall St. analysts upgraded their ratings of THQ stocks. Evan S. Wilson, a research analyst at Pacific Crest Securities, is bullish on THQ's growth prospects.

"I think that prospects for growth are very good. THQ has executed on all of its major positions. Its focus on the hand held and wireless market will continue to drive growth," Wilson said. "I have the stock rated outperform. There is room for the stock to grow. My price target for it is $30 a share. I expect them to execute well in the next quarter and in subsequent quarters."

Perhaps the primary dark cloud on THQ's horizon is the potential fallout that it could encounter from the Jakks Pacific Inc./World Wrestling Entertainment Inc. licensing scandal. The scandal stems from WWE's former licensing chief, James K. Bell's confession that he had accepted kickbacks in exchange for handing out WWE licenses. The names of the licensees in Bell's scheme were not identified. WWE has filed a separate civil suit against Jakks, the toy makers' top executives, Bell and others. It alleged that Jakks paid $100,000 in bribes, split by Bell and Stanley Shenker, an outside WWE licensing agent.

Stock stability

The WWE license which the bribes allegedly paid for is jointly owned by Jakks and THQ. Jakks has denied the allegations and thus far THQ has yet to be implicated in any wrongdoing. In the light of the alleged indiscretions, Jakks' stock took a major plunge while THQ's has maintained stability. Farrell has steadfastly proclaimed his company's innocence.

"The complaint is public and our position has been fairly clear. THQ is named in the suit because of the joint licensing venture with Jakks. We're not accused of any wrongdoing and the market understands that. We certainly didn't know about any of these allegations until they came out," Farrell said.

Wilson expects the lawsuit to have little or no impact upon THQ's lucrative business relationship with WWE.

"It's unclear exactly what's going to happen. From our perspective the WWE and THQ have a very close relationship. It seems like no matter what happens, they'll be partners," Wilson said.

As for the coming years, THQ and Farrell expect continued profits. According to Farrell, the company will rely heavily upon its core franchises: WWE video games, a licensing agreement with Pixar Animation Studios and the Nickelodeon deal. Additionally, Farrell touts the viability of the Tak and Full Spectrum Warrior franchises.

THQ Inc.

Stock Prices

Feb. 24, 2004   $19.05
Feb. 24, 2005   $26.70

Note: Table made from line graph.

YEAR (March 31)                    2004      2003

Revenue (millions)               $640.9     $66.8
Total Expenses (millions)        $592.0     $76.3
Operating income (millions)       $48.9    ($9.5)
Net Income (millions)             $35.8    ($7.7)
Earnings Per Share                 $0.9   ($0.20)

SUMMARY

Business: Video Game Publisher
Headquarters: Calabasas
CEO: Brian J. Farrell
Market Cap: $1,065.11 million Dividend Yield: N/A
Total Liabilities: $88.6 million P/E: 18.73
Long-Term Debt: $0