Nintendo Upward Guidance A Certainty

Nintendo management has a penchant for significantly understating future sales, income and dividends. This characteristic is admirable and indicative of its innately conservative corporate culture that has thus far benefited Nintendo stockholders. The pattern of Nintendo lowballing its likely financial results is clear and strongly suggests that the fiscal 2008 forecasted sales and net income per share included in its April 26, 2007 press release are artificially low.

The fact is that the 2007 fiscal year financial results released on April 26, 2007 dwarfed the guidance given by Nintendo on May 25, 2006, July 24, 2006, October 3, 2006, and January 10, 2007. Its May 25th forecast stated it expected 2007 net sales of 600 billion yen, net income of 65 billion yen, and earnings per share of 508.15 yen. Nintendo actually reported 966.5 billion yen in net sales, 174.29 billion yen in net income, and earnings per share of 1,363 yen. The actual results for fiscal 2007, which ended March 31, 2007, therefore, far exceeded the forecast made 10 months earlier. In fact, net sales were 61.1% above guidance, while earnings per share and net income were 168% above Nintendo management’s forecast.

Similarly, actual 2007 net sales exceeded the July 24th upward revised forecast by 55.7, while earnings per share were 110% above forecast. Nintendo revised its guidance upward once again on October 3rd but those revised net sales and earnings were exceeded by 30.6% and 74.5%, respectively. On January 10, 2007 Nintendo again revised its guidance upward but it still exceeded its upward revisions in net sales by 7.4% and earnings per share by 45.3%.

It is readily apparent that Nintendo management’s forecasts are consistently too low. Accordingly, investors can expect that Nintendo’s actual financial results for its fiscal year ending March 31, 2008 will far exceed its guidance of 1.14 trillion yen in net sales and earnings per share of 1,368 yen. Furthermore, investors can expect to see at least three significant upward revisions in net sales and earnings per share by Nintendo management during the next eight months. Those revisions will likely be announced in July, October, and January.

Nintendo’s Share Price Expected To Skyrocket

A few hours after this blog forecast that Nintendo would release an upward revision of its fiscal 2007 results it did exactly that. Nintendo’s April 5, 2007 announcement that it exceeded its own January 10, 2007 upward revisions was well received by shareholders.

The price of its shares rose 900 yen on the Tokyo Stock Exchange immediately following the Thursday mid-day press release and closed the day up 550 or 1.62%. The next day, Friday, April 6th, Nintendo rose an additional 800 yen or 2.33% to close at 35,100 yen, which put the intrinsic value of the NTDOY shares at $36.95.

The official April 5th release stated that the company intends to accelerate its financial closing process so that it will release its March 31, 2007 fiscal year results on April 26, 2007. That is a full month earlier than comparable releases in 2005 and 2006 and indicative of a company management that is anxious to report its good news

Nintendo whetted the appetite of shareholders when it stated that it exceeded its forecasts of sales, consolidated operating income, consolidated income before income taxes and extraordinary items, and consolidated net income. In particular it noted that sales were 66 billion yen greater and that foreign exchange would yield about a 30 billion yen boost. Nintendo also stated that it would likely pay its year-end dividend based on its 50% of net income.

These statements strongly suggest that Nintendo will report fiscal 2007 net income of about 159 billion yen or 1,240 yen per share up 62.6% from 2006. Furthermore, it will likely pay a year-end dividend of 550 yen, which is in addition to its regular 70 yen, interim dividend. Its expected total fiscal 2007 dividends of 620 yen would represent a 59% increase above its fiscal 2006 dividends of 390 yen.

An examination of quarterly results shows that Nintendo’s sales are in a dramatic uptrend. Its sales for the quarters ended June, September, and December were up 85%, 59%, and 75%, respectively over prior year comparable quarterly sales. Even more remarkable is the fact that its sales for the quarter ended March 2007 at 253 billion yen are expected to be about 160% above the comparable March 2006 quarter.

On April 5, 2007 Nintendo was selling at a price earnings (PE) ratio of 27.7 based on estimated fiscal 2007 earnings and it provided a healthy 1.8% dividend yield. Nintendo’s PE multiple is much too low considering its sales and income growth rates, its abundant cash position ($6.7 billion), its debt-free balance sheet, and comparable PE multiples of other publicly held gaming companies. For example, the PE multiple of Gamestop is 33, THQ is 45, Activision is 72, and Electronic Arts is 190. By the way, none of these companies pay a dividend.

Nintendo shareholders should expect generous total returns going forward from a combination of dramatic growth in earnings per share, further dividend increases , and a higher PE multiple. Furthermore, favorable financial coverage of Nintendo will surely call it to the attention of the investing public who remain largely unaware of how to buy stock in Nintendo.

Nintendo Expected to Announce Upward Revision of Fiscal 2007 Net Income

During the past two years Nintendo has established a pattern of announcing upward revisions of its forecasted fiscal year-end income and dividends during the first week in April. On April 6, 2005 it announced that it had exceeded its forecasted net income by 17.1% for its March 31, 2005 fiscal year. A year later on April 4, 2006 it announced that it had exceeded its forecasted net income for its March 31, 2006 fiscal year by 26.7%.

Within the next few days, shareholders should expect Nintendo to once again announce that it exceeded its forecasted net income for its latest fiscal year ended March 31, 2007. The forthcoming upward revision will be partially due to the fact that Nintendo’s earlier 2007 forecast assumed a weaker dollar and Euro versus the yen.

As of March 31, 2007 the U.S. dollar was trading at 118.05 yen and Euro was trading at 157.33 yen. Nintendo’s financial forecast modifications of January 10, 2007 assumed exchange rates of 115 yen to the U.S. dollar and 143 yen to the Euro. These differing exchange rates benefit Nintendo’s net income because it has deposits and receivables denominated in dollars as well as Euros. For example, as of December 31, 2006 Nintendo had about $3.9 billion in cash, deposits, and receivables denominated in U.S. dollars and $1.5 billion denominated in Euros.

A comparison of amounts denominated in other currencies along with the forecast versus actual exchange rates prevailing on March 31, 2007, Nintendo’s fiscal year-end, suggests that it will announce an increase in net income of about 5% above its January 10, 2007 forecast.