Nintendo Earnings Preview: Deep Stock Analysis

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The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.

On Wednesday, October 24, at roughly 4:00pm Tokyo time / 3:00am ET, Nintendo (7974:JP) will report fiscal Q2:13 (ending September) results. Nintendo will not hold a call for the release, and has not scheduled a press briefing for the next day.

We expect a Q2 miss. Nintendo is likely to report Q2 results below our estimates for revenue of ¥100 billion and EPS of ¥(127), compared to consensus of ¥108 billion and ¥(84) and implied guidance of ¥145 billion and ¥(22). According to NPD, Nintendo’s U.S. hardware dollar sales were down 40% y-o-y (our model has down 30%), while software dollar sales were down 5% (our model is flat). F/X rates for the quarter were ¥78/$1 and ¥100/€1 versus Nintendo’s FY:13 assumptions of ¥80/$1 and ¥105/€1, negatively impacting results.

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Nintendo will likely lower FY:13 revenue guidance of ¥820 billion, but may maintain guidance for operating income and EPS of ¥35 billion and ¥156, respectively, due to the positive impact on margins of Wii U pricing.

In September, Nintendo announced pricing and release dates (November 18 in the U.S.) for the Wii U. It will have two SKUs: the white Basic Set for $299 /¥25,000 and the black Premium Set for $349 / ¥30,000, which has more memory and includes the Nintendo Land game. We expect Premium Set sales to dominate.

We think that Wii U’s price points are appropriate given likely demand from Nintendo’s core fan base, but believe that pricing will be too high to sustain long-term demand. Demand for the Wii U will likely wane once Nintendo’s core fan base has purchased the first 6-7 million units, especially given the number of cheaper, comparable alternatives. For example, the prices of the Xbox 360 Kinect bundles have been reduced by $50 at Amazon, GameStop (NYSE:GME), and Wal-Mart (NYSE:WMT).

DS and 3DS unit guidance is likely unrealistic. Nintendo guided to growth for combined DS/3DS hardware and software units for FY:13. In our view, handheld hardware sales will continue to decline due to migration of casual gamers to mobile devices. We do not expect handheld hardware to see a rebound in sales without price cuts. Similarly, we think that overall handheld software growth is unlikely.

Maintaining our NEUTRAL rating and our 12-month price target of ¥10,000, a slight premium to Nintendo’s ¥9,000/share in cash, giving it credit for brand equity. We cannot assign a P/E, given the company’s low potential to generate significant profits in light of declining product demand and unfavorable F/X.

Michael Pachter is an analyst at Wedbush Securities. 

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