By Asif Khan and Adam Kraus
Buy Nintendo. It may seem odd for us to say this after the tragic earthquake, tsunami and nuclear aftermath in Japan, but we are value investors and tend to view exogenous events like this as opportunities. We feel Nintendo is lucky that their new 3DS system has no shortages as other companies are fighting Japanese supply chain issues. Japanese equities as a whole were already trading at a discount to most other developed markets before the earthquake and we believe the Nikkei’s crash in March has provided discerning investors great opportunities to invest in the third largest economy in the world.
After reporting terrible earnings in 2010, Nintendo poses a very interesting value to us right here. They will face a very low hurdle with respects to year over year earnings comparisons going forward. We believe last year’s earnings will be the trough for the current product cycle. We estimate that NTDOY will have a dividend yielding 3.6% or higher this year. The company has a large cash hoard that is approaching almost half of its market capitalisation, so this dividend could go higher as earnings grow. The stock is trading very close to its 52 week low of $30.10/share of the NTDOY ADR, and it is very close to oversold on RSI indicators.
Lastly, there has been rampant speculation that a new console will be revealed at this year’s E3. The company has a history of great innovative products and we eagerly await any news on their next generation console. While we do believe that Nintendo is working on the successor to the Wii, we would caution investors that such a product release would probably not come until late 2012, if not sometime in 2013.
The near term catalyst for the stock will be 3DS sales, and a possible earnings recovery from the trough of 2010. Preliminary sales figures for the 3DS are strong in spite of a relatively lackluster lineup of launch titles, and we will gain more clarity when the company reports earnings on April 25th. Bottom line: Buy Nintendo! We recommend initiating a position here as negative investor sentiment could take it lower in the short term, but we ultimately have a strong conviction that investors with a long term time horizon will be happy they bought Nintendo at these levels.
Investors should do their own research or consult their advisor before acting on this information. Panoptic Management Consultants, Inc. is a Registered Investment Advisor that was founded in 2008. Please go to our website www.panopticinvesting.com for more information about fundamental investing as well as technical analysis. For prospective client inquiries please contact us at [email protected]
At the time of this article our CEO, Asif A. Khan, CPA, his family members and/or Virtue LLC had the following positions:
At the time of this article, clients of Panoptic Management Consultants Inc. had the following positions: