Good games plan for 2010

Rare declines in 2009 set stage for a big year

News out of video game makers this year mirrors trends seen throughout 2009: weaker results with rays of light sprinkled in.

But Wall Street expects that after a rare decline in video game software and overall game industry sales in 2009 amid the recession, the sector will return to growth mode this year. Gaming has been one of the entertainment field's biggest engines and post record sales in 2008.

Stronger console sales late in 2009 and a slew of big releases -- from latest games of franchises including "Final Fantasy," "Splinter Cell," "Gran Turismo," "Halo" and "FIFA World Cup" -- are expected to help boost sales this year.

CBS Interactive's GameSpot Trax said the list of the year's most anticipated games is headed by "Final Fantasy XIII," "Bayonetta," "Mass Effect 2," "Naruto Ultimate Ninja 3" and "Dante's Inferno."

A slew of hit releases could reignite key sector stocks, most of which are off their 52-week highs that many established during summer.

Activision Blizzard said last week that sales of last year's best-selling game, "Call of Duty: Modern Warfare 2," have topped $1 billion.

But that's where the good news stops.

Retailer GameStop reported disappointing holiday-season sales; Electronic Arts slashed its full-year earnings forecast, citing weakness in European markets; and Euro game maker Ubisoft cut its guidance for the fiscal year ending March 31.

Analysts are saying that now might be a great time to load up on the segment before stocks start moving higher. Ahead of the Martin Luther King Jr. holiday, most ended last week closer to their 52-week lows than highs.

Even GameStop said it deems itself a bargain, announcing plans to buy back $400 million worth of its stock.

Michael Pachter of Wedbush Securities has video game stocks as his top pick. He expects the industry to grow by 10% or so this year.

"There are simply too many great games, plus innovative control schemes from Sony and Microsoft, coupled with easy comparisons," he said. "So I think that the industry will see robust sales growth all year after a slow January.

But Wall Street isn't unanimous in its bullishness.

"We see this as yet another troubling sign, as it could imply that both casual and hard-core gamers are cutting game expenditures," Tony Wible of Janney Montgomery Scott said after EA slashed its guidance.

Research firm NPD Group last week reported that in 2009, overall video game industry sales -- including software, hardware and accessories -- fell 8% over 2008 to $20 billion. Software sales alone declined 11%.

"Clearly, 2009 was a tough year for consumers and the national economy," said Michael Gallagher, president and CEO of the Entertainment Software Assn. But he noted it was still the second-highest-grossing year for the gaming biz.

Many analysts expect a rebound in software sales, with Activision a favorite pick. Pachter calls it the safe bet for gaming investors.

"They have good management, have not missed numbers since late 2005 and have very strong franchises that should allow them to grow earnings in 2010," he said. "The knock on them is that the 'Guitar Hero' franchise declined in 2009 and that 'Call of Duty' did so phenomenally well, it will be difficult to repeat the performance in 2010. However, their Blizzard business should make up the slack, with 'StarCraft 2' and 'World of Warcraft: Cataclysm' (the expansion pack) generating a ton of revenue."

Pachter rates Activision "outperform" with a $16 price target.

Lazard Capital Markets analyst Colin Sebastian also calls it his favorite gaming stock, though he took a cue from EA's reduced guidance and lowered his expectations for Activision.

As for EA, its problems might be less about the industry and more about its specific strategy, which lately has focused on digital sales rather than packaged goods.

"EA has been changing its focus about every six months and has managed to lose almost 70% of shareholder value in only two years," said Rod Perry, a money manager who specializes in video games. "Investing in EA for the long term has become a risk because the company has abandoned what has worked in the past and is running around chasing the latest fad."

Still, at least some analysts expect the stock to rise this year.

"Though the macro backdrop remains murky, we believe that EA has a strong slate of games which, at a minimum, should show improved quality and ultimately could lead to stronger performance," BMO Capital Markets analyst Edward Williams said in reiterating his "outperform" rating. But he cut his price target by $5 to $22.

Pachter, who also has an "outperform" rating on the stock, did the same, cutting his target by $4 to $23.

And even after its sluggish holiday momentum, GameStop is touted by Street folks as having upside given that it hit a 52-week low last week.

"The share repurchase reflects confidence in the long-term model," said Sebastian, who set a $25 target on GameStop.

Pachter is more bullish with a $28 target as he is confident that big titles including "Army of Two: The 40th Day," "BioShock 2," Gran Turismo 5" and "Splinter Cell Conviction" will drive sales when they are released.

Perry has GameStop as his top pick this year.

"Worries about competition and digital sales are overblown, giving it a very low valuation in a richly valued market," he said.

Paul Bond reported from Los Angeles; Georg Szalai reported from New York.
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