Thursday, February 22, 2007

Nintendo Shares Ready To Soar

As a regular viewer of Jim Cramer's Mad Money show, I was surprised when he stated on his Friday, November 17, 2006 show: "You can't play the Wii by buying Nintendo because it doesn't even trade here." That statement is not correct.

Since February 2006 people have been able to buy Nintendo American Depositary Receipts (ADRs) (symbol NTDOY) on the over-the-counter market. A total of 50 million NTDOY shares were registered with the SEC in February 2006. JP Morgan Chase is the depositary and eight (8) NTDOY shares equal one (1) Nintendo Japan share. The intrinsic value of a share of NTDOY can be calculated by converting the yen price of a share of Nintendo stock as quoted on the Tokyo Stock Exchange into dollars and then dividing by eight (8). It should be noted that Japan is 14 hours ahead of the United States; therefore, Tokyo trading generally dictates the price of NTDOY.

As an avid gamer and investor, I am a big fan of Nintendo. I own NTDOY shares and believe that everone who buys a Nintendo Wii or DS Lite needs to also buy NTDOY shares. I am convinced that the profit they will earn as shareholders will dwarf the cost of their consoles and games.

On February 21, 2007 NTDOY closed at $33.80, whereas Nintendo Japan closed on the Toyko Stock Exchange at 31,400 Yen. At those prices, Nintendo has a reported PE of 29.8 and a dividend yield of 1.25%.

Nintendo's fiscal year ends March 31. In a recent (January 25, 2007) news release Nintendo management announced impressive nine-month results for the period ended December 31, 2006. It stated that both "Nintendo DS" hardware and software recorded very strong sales for the nine month period ended December 31, 2006. "Nintendo DS" hardware has been the fastest rising game platform ever in the Japan market, and, in addition, has sold well in overseas markets. As a result, sales in the first three quarters have reached 18.88 million units on a worldwide basis. As for ” Nintendo DS” software, net sales have also accelerated, supported by a number of millon-seller titles. Sales have been led by "New Super Mario Bros.", with 8.64 million units sold on a worldwide basis and continuing strong sales of "Touch! Generations" titles such as "Brain Age: Train Your Brain in Minutes a Day!" and "Nintendogs". In the console business, "Wii" hardware (launched at the end of last year) got off to a favorable start and “Wii” software
titles such as "The Legend of Zelda : Twilight Princess" enjoyed brisk sales as well.

As a result, net sales rose to 712.5 billion yen (72.8% up y/y), causing operating income to reach 167.6 billion yen (102.5% up y/y) despite a rise in selling, general, and administrative expenses, which was primarily driven by higher marketing expenses. Income before income taxes and extraordinary items was 220.7 billion yen (50.5% up y/y) primarily due to 26.0 billion yen (45.2 billion yen last nine-month period) of foreign exchange gains. Net income reached 131.9 billion yen exceeding last year by 43.1%.

Importantly, Nintendo has a stated dividend policy of distributing the higher of the amount calculated by dividing 33% of consolidated operating income by the total number of outstanding shares, excluding treasury stock, as of March 31, 2007 rounded up to the 10 yen digit, or the amount calculated based on the 50% consolidated net income standard rounded up to the 10 yen digit. Based on this policy, the year-end dividend per share and the annual dividend per share are expected to be 410 yen and 480 yen, respectively. The ex-dividend date for the year-end dividend will be in March.

Unlike Sony with its PS3 and Microsoft with its XBox, Nintendo offers a pure play on a widely heralded new game product and has said it will make a profit on its Wii console sales. Nintendo says it will ship 4 million Wii units before the end of 2006. Importantly, most of Nintendo's biggest selling titles like "Legend of Zelda" and "Super Mario Brothers" are proprietary.

The trading volume in NTDOY has been rising as more people discover they can buy shares in Nintendo and for the past 10 trading days the average daily volume according to eTrade has been 356,824 shares.
A report in the The Financial Times on Wednesday, February 21, 2007 quotes one of Tokyo's more prominent game analysts, Merrill Lynch's Yoshiyuki Kinoshita, as being beyond bullish on the Wii. He told the UK-based business daily that he expects the console, which has appealed to nongamers via its motion-sensing capabilities, to be in 30 percent of US homes by 2011. In Japan, Kinoshita expects a full third of households to have the machine in four years. He believes the future of the Wii console will be brighter than anyone previously thought.