Yesterday, Ubisoft announced that it was raising its full year expectations for sales. Unsurprisingly, this has resulted in a note from Wedbush Morgan Securities' Michael Pachter expressing his own high expectations for Ubisoft.
Here is Pachter's note on Ubisoft Entertainment:
- Ubisoft significantly raised its FY:08 guidance, due to continued strong sales of Assassin's Creed, its "casual" games, and new release Tom Clancy's Rainbow Six Vegas 2.
- Management raised FY:08 guidance for revenue to €920 million from €875 million and for operating income to 14% from "at least" 13% (implying raised EPS to €2.27 from €2.05, including €0.56/share in other financial gains).
- The company did not update its prior FY:09 guidance for revenue of €1 billion and for operating income of "at least" 11% (implying EPS guidance of €1.56).
- We are raising our FY:08 estimates for revenue to €925 million from €880 million, and for EPS to €2.30 from €2.15 (including €0.56/share in nonrecurring gains due to the sale of its Gameloft shares).
- We are maintaining our FY:09 estimates for revenue of €1.050 billion (13% growth) and EPS of €2.25 (29% pro forma EPS growth, significantly above management guidance).
- We expect the company to regularly "beat and raise" guidance, providing a catalyst for Ubisoft shares to appreciate. The company's strong lineup should position it to deliver upside in FY:09.
- Maintaining STRONG BUY and our €75 price target, which reflects a forward P/E multiple of 25x our expected average EPS over the next two years. '
Clearly, this is good news for investors in Ubisoft, but it is even better news for Ubisoft itself. Putting aside the natural monetary considerations, a continued commitment to "beating and raising" guidance, as Pachter points out, pushes Ubisoft's stock beyond the reach of all but the most voracious of acquisition hungry companies. Where Take-Two has shown weakness in the face of EA's takeover bid, Ubisoft has done its best to remove itself from the acquisition conversation.
While this may strengthen Ubisoft against acquisition by another publisher, Paramount recently put its Viacom-backed foot into the gaming arena. Viacom has more than enough wealth to acquire a publisher like Ubisoft. Doing so would enable Paramount to more capably compete against Warner Bros. Home Entertainment who has Traveler's Tales to develop games. Ubisoft already develops CSI: titles, which is part of the intellectual property of CBS, formerly Viacom. It would allow for a cross-media synergy.
On the other hand, Ubisoft does not have the necessary focus on casual games that Paramount cited in its press release as its primary interest in the gaming field.
THQ, however, has a whole host of titles that are casual-friendly, like Bratz and the Nicktoons games. Nickelodeon is a Viacom network, so this perhaps makes more sense from a strategic standpoint. This all may be a moot point because any acquisition of Ubisoft or THQ would be prohibitive in cost for the acquiring company and the general feel of Paramount's foray into the gaming world is tentative. If Warner Bros. were to start making moves toward acquiring one of these titles, then it may be a lot more likely for Paramount to move into acquisition mode.
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