After four years of flat trading, shares of Activision Blizzard rallied more than 11% following a breakout quarter, and Sterne Agee followed suit with a bullish outlook. The firm said that the company is well-positioned for new consoles from developers and predicts that buybacks could occur due to the company’s large cash position and short term investments. Investors should also note that despite its rally the stock is still greatly undervalued. Now that it has broken out to trade higher, look for continued gains over the next couple weeks.
We continue to believe that the company has many positive catalysts that could lead to multiple expansion. These catalysts include: (1) a clearer picture of the company’s future from the statements or actions of Vivendi’s management or from any changes to the balance sheet, (2) year-over-year growth from Call of Duty catalog sales (packaged goods and DLC) over the next quarter from a free Eliteservice, (3) continued strong catalog sales of Skylanders Giants toys, (4) a firming up of the 2013 release slate, (5) continued stability for World of Warcraftsubscriptions, and (6) continued margin expansion from digital sales.
Maintaining our OUTPERFORM rating and $19 price target, which reflects a forward multiple of ≈ 13x our 2013 EPS estimate of $1.12 plus $4/share in cash. This is a discount to the market multiple due to weak investor sentiment towards the video game industry, which is suffering from packaged goods declines.