Nintendo Sitting On 40% Cash

Merry Christmas all and Happy Holidays. This weekend Barron's pointed out that Nintendo (NTDOY.PK) sits on 40% cash, at 18-19x 06 earnings if you back this out. They also point out that Nintendo expenses R&D immediately which makes for more conservative earnings numbers, whereas its competitors capitalize theses costs.  (which we think is a fair method, but still it means Nintendo earnings could be understated in comparison). Nintendo also holds 15% of the home console market. The article here.

And for some, Nintendo is looking like a neglected, and hugely overcapitalized, stock. Nintendo sits on $6.1 billion of cash, equivalent to about 40% of market cap. Software development is a notoriously expensive business, but whether Nintendo should lift its reasonably generous payouts is a good question.

Including the cash, Nintendo trades at 23.6 times expected earnings for March '06, versus 21 times for Square Enix, although still far below the 37 times of Electronic Arts. Back out the cash, however, and Nintendo's multiple falls to 18.6, compared with 19.5 for Activision, 19.4 for Konami and 20.6 for Square Enix. Fans point out that Nintendo's accounting is more conservative. The company fully expenses software research-and-development costs. Its rivals capitalize the costs. ...

Nintendo's margins look better than the competition's, too. Based on consensus estimates, it net margins for the next three years are estimated to be in the 14% to 15% range, compared with 11% to 13% for Square Enix and 10% to 12% for Sega Sammy. (Capcom and Konami are less profitable.)

Given that we've only heard about Microsoft (NSDQ:MSFT) and Sony (NYSE:SNE) lately in the console space, Nintendo does also seem like a sound candidate for a contrarian play. Perhaps they can find a niche and hit their stride once again...

Comments

[Risky Returns]

ERTS also fully expenses development costs...