'Halo 3' kickstarts season for retailer

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Selling video games at retail might be a less risky business than publishing them, judging from a couple of analyst notes this week.

One, from Lazard Capital Markets, praises retailer GameStop for benefiting from healthy momentum ignited by Microsoft's launch of "Halo 3."

The other, from BMO Capital Markets, slams publisher Midway Games, which preannounced a disappointing quarter due to soft sales and some delays of upcoming titles.

Midway shares are down 43% so far this year, while GameStop shares are up 98% this year.

And Christmas should bring more cheer to GameStop shareholders, as "Call of Duty 4," "Assassin's Creed," "Rock Band," "Need for Speed" and "Super Mario Galaxy" are expected to make for popular presents.

Unfortunately for Midway shareholders, none of those titles are from Midway. Instead, it has "BlackSite: Area 51," sales of which have been lower than expected; "Stranglehold," which Midway says will ship in the fourth quarter and not the third, as was expected; and the hotly anticipated "Unreal Tournament 3," the release of which was moved to the first quarter of next year, missing the gift-giving season.

Midway "continues to struggle in an improving environment owing to development difficulties and a lack of scale," Edward Williams of BMO said. "Until these issues are satisfactorily addressed, we believe the shares will continue to languish."

Meanwhile, GameStop is firing on all cylinders.

"We are raising our estimates and price target on GameStop, Colin Sebastian of Lazard said.

The analyst went from a $52 target to $61, and his earnings-per-share estimate grew by two pennies to $1.49 for fiscal 2007. He also boosted his revenue expectation by $10 million to $6.45 billion. Shares closed Thursday at $54.63.

GameStop is a key beneficiary of a secular upswing in the video game industry, Sebastian said, identifying such tailwinds as increasing hardware sales, a growing used-game business and an improving next-generation software release schedule.

And "Halo 3" certainly hasn't hurt. Sebastian figures that Microsoft shipped 4 million units of the game worldwide and that GameStop will capture 25%-30% market share on that title. Thus, $80 million-$90 million in "Halo 3" sales is not an unreasonable expectation through the end of GameStop's October quarter, he said.
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