Pachter predicts Nintendo to raise hardware expectations after strong Q3 results

By Mike, Monday, 26 January 2009 16:26 GMT

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Nintendo is set to unveil its fiscal Q3 09 results at close of trading on Thursday, and Wedbush Morgan analyst Michael Pachter has issued a note saying he expects the company to post strong financial results.

“We expect the company to report results close to our estimate for revenue of ¥789 billion, but ¥100 – 150/share below our EPS estimate of ¥1,033,” said the research note.

“We think that results were driven by strong hardware sales.”

Wedbush Morgan also predicts Nintendo will revise its hardware projections positively with Wii figures rising to 30.5 million units sold, compared with the current estimate of 27.5 million units.

Nintendo DS expectations will rise from 30.1 million units to 31.5 million.

Pachter states that “Nintendo’s recent operating performance has been spectacular and we expect this to continue in FY:10.”

Read the research note in full after the break.

By Mike Bowden

Nintendo (7974.JP / NTDOY.US)
Q3 Preview: Expect Operating Upside, with Currency
Translation Affecting Outlook; We Continue to Believe
Company’s Valuation Is Compelling As Fundamentals Remain
Strong

• After the close of the Tokyo Stock Exchange on Thursday, January 29 (4:00pm Tokyo/2:00am ET), Nintendo will report its fiscal Q3 2009 (ending December) earnings. As in the past, the company will not hold a conference call, but will brief the press on January 30 (2:00 pm Tokyo/12:00am ET) in Tokyo, without a webcast.

• We expect the company to report results close to our estimate for revenue of ¥789 billion, but ¥100 – 150/share below our EPS estimate of ¥1,033. We think that results were driven by strong hardware sales, and expect revenue and EPS estimates to come in well above consensus estimates for revenue of ¥753 billion and EPS of ¥794. There was no company guidance for the quarter.

• We expect Nintendo to lower EPS guidance for the full year, as the Yen has appreciated dramatically compared to the Euro and Dollar since the end of Q2. Nintendo’s guidance assumed ¥100/$1 and ¥140/€1 for all of FY:09, while current rates are ¥89/$1 and ¥116/€1. Average rates for the fiscal year-to-date are close to company guidance, but it is likely that full year weighted average exchange rates will come in closer
to ¥95/$1 and ¥135/€1. Current full-year guidance is for revenue of ¥2,000 billion and EPS of ¥2,698, and we think that the company will maintain its revenue guidance, but lower its EPS guidance by ¥100 – 150. It is important to note that current consensus for EPS is ¥2,373, and we expect the company’s guidance to exceed this estimate.

• We expect the company to raise guidance slightly for hardware sales (currently for Wii 27.5 million units and for DS 30.5 million units). We think that the Wii forecast will increase to 28.5 million units, and the DS forecast (including the DSi) will increase to 31.5 million units.

• Nintendo’s recent operating performance has been spectacular and we expect this to continue in FY:10. Notwithstanding its expected lowering of guidance, we believe that the company can dramatically grow earnings in FY:10. We have modeled relatively flat revenues, with hardware contributing less and software contributing more next year, triggering a material increase in gross margin and operating profit.

• Maintaining BUY, and lowering our price target to ¥58,000 from ¥59,000, which reflects a forward P/E multiple of 15x our FY:10 adjusted EPS estimate of ¥3,350, plus an estimated ¥7,500/share in cash. We value Nintendo at a multiple at the low end of its historical range in light of recent market multiple contraction.

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