Video value? New titles boost gaming sector

"Sales of games and consoles have been falling since the beginning of the year as the effect of the recession combined with a lack of compelling new titles kept consumers on the sidelines.

"The major U.S.-based game makers have all felt the slowdown that was reflected by the latest resultsfrom GameStop, the nation's largest retailer of video games and consoles, confirmed the dwindling results for the industry.

"The retailer reported earnings of $38.7 million, or 23 cents per share, for the period ended August 1st, which was 32% lower than the year-earlier period. Total sales fell by nearly -% to $1.74 billion, while same-store sales plunged 14.1%.

"Electronic Arts announced its first quarter results in August.. The company's loss widened during what is a seasonally soft sales quarter, but it was a lot better than Wall Street expected on an adjusted basis.

"EA makes the popular Madden NFL Football games named for the retired coach and broadcaster, but its most popular titles this year have been The Sims 3, the third installment of a popular life simulation game, and the exercise game EA Sports Active for Nintendo.

Electronic Arts sold 3.7 million copies of The Sims 3, and 1.8 million copies of EA Sports Active, which has been the company's best-selling title ever for the Wii. The company said it had four of the top-10 selling games in Europe and North America during the quarter.

"Despite the relatively strong results, the company did not adjust its full-year forecast. Analysts seem to think the company is being conservative given a strong line-up of new titles due out in the fall.

"Those include a FIFA soccer game and the next installment of the popular Need For Speed racing game. EA is also the distributor of MTV Games' Rock Band: The Beatles.

"Like Electronic Arts, Activision Blizzard reported better-than-expected Q2 earnings. It earned $195 million, or 15 cents a share, on total revenue of $1.04 billion during the second quart.

"Adjusted earnings were $112 million, or 8 cents a share, which topped Wall Street's expectations by a penny and its own guidance by two cents.

"It sales were led by the latest version of its Transformers series and a game based on the Marvel Entertainment characters X-Men. The company's other big franchise games include Guitar Hero and Call of Duty, both of which will get refreshes this fall.

"Activision is delaying the release of Singularity, which had previously been announced, along with StarCraft II. The latter is a science fiction game from the company's Blizzard Entertainment unit, which also produces the popular online multi-player title World of Warcraft.

"Overall, the game stocks are all trailing the performance of the S&P 500 index on a year-over-year basis, but from the beginning of this year they have performed strongly relative to the broad benchmark.

"The business has always been lumpy, driven by releases dates and the popularity of titles, but the weak economy has increased the challenges. The industry is banking on the new titles being released in the next few months to rescue the year.

"GameStop shares have meandered for much of the summer but we would not be surprised to see the stock bounce in reaction to strong sales of a new game. Rock Band: The Beatles may be one such catalyst.

"GameStop hasn't been a beneficiary of recent optimism about retail sales, but if the negativity is largely priced in, the stock might surprise investors later in the year.

"Activision Blizzard is our favorite video game maker at this time, as we like the added recurring revenue stream it gets from its established online games like World of Warcraft, as well as its solid franchise of console games.

"With the industry in the dumps and the stocks still pretty beaten down, Activision and the others might make for an intriguing contrarian play on a second half and/or 2010 recovery."

Steven Halpern's TheStockAdvisors.com offers a free daily overview of the favorite stock picks and investment ideas from the nation's leading financial newsletter advisors.