You honestly have to wonder what Sumner Redstone, the chairman of both Viacom (NYSE: VIA) and CBS (NYSE: CBS), thinks about Midway Games (NYSE: MWY). The guy has a huge investment in the struggling software publisher. He owns something like 87% of the company's shares. He controls Midway. I mean, does he look at the performance of this business? Does it make him angry? Confused?
Anyway, Midway reported earnings for the second quarter earlier in the week, and as usual, they weren't the stuff of Wall Street dreams (see more earnings news), Revenues declined 26% to $23.4 million. The publisher lost $0.29 per diluted share on an adjusted basis. Last year at this time the loss was $0.12 per diluted share on an adjusted basis. That's horrible. For Q3, management expects an adjusted loss of $0.27 per diluted share. Midway is excited about its upcoming Mortal Kombat vs. DC Universe title, to be released in time for the holidays. I'm not excited. Will the game be enough to propel the stock, which closed on Wednesday at a bargain price of $2.66, higher? I use the phrase "bargain price" sarcastically, of course.
I've often wondered about the Midway dilemma. What can this company possibly do to improve itself? Should Redstone order management to look for better synergies between it and the Viacom/CBS content library and/or platforms? Midway has worked with MTV before on promoting a few titles. It's too bad that Midway doesn't have access to some of the popular characters of the Nickelodeon channel. THQ (NASDAQ: THQI) currently has that license. I'd have to believe that good ole SpongeBob SquarePants would have helped things out.
I really want to turn bullish on Midway Games Inc. (NYSE: MWY), but there's no way I can do that right now. The company's stock is below $3 a share, and it's there for a reason. But, let's first look at a couple positives from the software publisher's latest earnings release. Net revenues shot up 170% to $29.9 million in Q1; that beat expectations, according to Briefing.com. And the net loss per share also beat expectations by a penny -- it came in at $0.29 per diluted share on an adjusted analysis.
But, that net loss is worse than the previous year's net loss of $0.20 per diluted share, also adjusted. Like I say, someday I want to report that Midway has turned the corner and is a buy. I simply can't do that, even though I recently bought the publisher's catalog title Rampage: Total Destruction for the Nintendo Gamecube and am having a great time with it -- guess it goes to show that you can't always judge a company's stock by the fact that you enjoy its products. One thing that Midway needs to do is perhaps seek some synergy from Viacom, Inc. (NYSE: VIA)'s MTV and Nickelodeon channels. Sumner Redstone is, after all, the controlling shareholder of Midway. Granted, THQ Inc. (NASDAQ: THQI) deals with the Nickelodeon characters at the moment, but in the future, Redstone needs to figure out a way to use his media assets to promote Midway and perhaps funnel some licensing deals to the publisher. MTV is certainly doing well with its own video-game ambitions via Rock Band, which is sold by Electronic Arts Inc. (NASDAQ: ERTS).
One thing I must point out is that, since my last article about Midway, the stock is up. This was mentioned to me by a reader. So, in objective trading terms, if you went against my opinion, you would have made money, no question. However, I have to stick to my guns and say that I personally wouldn't play the volatility in Midway's shares. Yes, you could luck out with it, maybe Redstone will come along one day and buy out the remaining shares at a big premium (doubtful, at least the big-premium part). I wouldn't want to speculate on such an outcome; I am still content with my Activision, Inc. (NASDAQ: ATVI) shares as a way to play video-game investing.
Disclosure: I own shares in Activision; positions can change at any time.
Midway Games (NYSE: MWY), a competitor of videogame publishers such as Activision (NYSE: ATVI), Electronic Arts (NASDAQ: ERTS), THQ (NASDAQ: THQI), and Take-Two (NASDAQ: TTWO), reported earnings on Thursday for the fourth quarter. They weren't good. Net revenues went down by 20%, and the loss widened to 33 cents per share versus a loss of 2 cents per share in the year-ago period. For the full year, net revenues declined 5%, and the loss widened to $1.07 per share versus a loss of 86 cents per share in 2006. Even on an adjusted basis, the losses were larger than before.
I've been following Midway for a long time, and I have to say that I just don't think the publisher's stock is worth anyone's time right now. Sony (NYSE: SNE), Microsoft (NASDAQ: MSFT), and Nintendo (OTC: NTDOY) all have their new consoles out -- PlayStation 3, Xbox 360, and Wii, respectively -- so Midway, if it were executing properly, should have been able to take advantage of them. It hasn't.
I see nothing in the release that indicates a positive catalyst is on the horizon for Midway and/or its stock. It's a cool publisher with some fun games, but I won't be buying its thesis -- if there is one -- anytime soon. I'll stick with my Activision shares, and I'd urge others to look at an EA, or even a THQ, for possible value.
Disclosure: Steven Mallas own shares of Activision; positions can change at any time.
MOST NOTEWORTHY: The interactive entertainment sector, CVS Corp (CVS) and two large retailers, J.C. Penney (JCP) & Federated Department Stores (FD), topped today's notable initiation list:
AG Edwards initiated Electronic Arts Inc (NASDAQ: ERTS), Activision, Inc (NASDAQ: ATVI), THQ Inc (NASDAQ: THQI) with Buy ratings and Take-Two Interactive Software (NASDAQ: TTWO), Midway Games Inc (NYSE: MWY) and GameStop Corp (NYSE: GME) with Hold ratings. The firm believes the video game industry is well-positioned for above-average L-T growth based on positive demographic trends. In addition, AG Edwards expects overall U.S. video game industry retail dollar sales to grow by 39% in 2007.
Elsewhere, Wachovia initiated CVS Corp (NYSE: CVS) with an Outperform rating. The firm believes CVS is well-positioned to take advantage of the fundamentals in the PBM business and find cost synergies from the merger.
Thomas Weisel initiated both J.C. Penney (NYSE: JCP) and Federated Department Stores (NYSE: FD) with market Weight ratings. The firm believes JCP will have more modest margin expansion going forward and believes high expectations and valuation for FD will limit its outperformance in the near-term.
OTHER INITIATIONS:
ThinkEquity started DivX, Inc (NASDAQ: DIVX) with a Buy rating and $26 target.
RBC initiated Trident Microsystems, Inc (NASDAQ: TRID) with a Sector Perform rating.
UBS initiated Teva Pharmaceutical Industries Ltd (NASDAQ: TEVA) with a Buy rating.
Pacific Growth started American Superconductor Corp (NASDAQ: AMSC) with a Neutral rating.
Susquehanna started Quality Systems, Inc (NASDAQ: QSII) with a Positive rating.
aQuantive (NASDAQ:AQNT) was started in new coverage as Outperform at Credit Suisse.
Jabil (NYSE:JBL) was downgraded to Sector Perform at CIBC, cut to Peer Perform at Bear Stearns.
EMC (NYSE:EMC) and Network Appliances (NASDAQ:NTAP) were raised to Overweight at J.P.Morgan.
Palm (NASDAQ:PALM) cut to Reduce at UBS, cut to neutral at BofA; stock down 2% after earnings and no buyout.
A.G.Edwards started the video game sector in new coverage: Game makers Activision (NASDAQ:ATVI), Electronic Arts (NASDAQ:ERTS), and THQ Interactive (NASDAQ:THQI) were all started as Buy ratings, while Take-Two Interactive (NASDAQ:TTWO) & Midway (NYSE:MWY) were started as Hold. GameStop (NYSE:GME) was started as a HOLD rating in the retail end.
Goldman Sachs notes: Coldwater Creek (NASDAQ:CWTR), Polo Ralph Lauren (NYSE:RL), and Urban Outfitters (NASDAQ:URBN) were all raised to Buy from Neutral. Liz Claiborne (NYSE:LIZ) was downgraded from Buy to Neutral. Goldman Sachs reiterated its Conviction Buy List on Coach (NYSE:COH) and maintained Buy ratings on Abercombie & Fitch (NYSE:ANF), Aeropostale (NYSE:ARO), and Nike (NYSE:NKE). Here is Goldman Sachs' full research summary.
Jon Ogg is a partner in 24/7 Wall St., LLC; he does not own securities in the companies he covers.
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