Market Overview

Perfect World Earnings Preview: Double-Digit EPS, Sales Growth Expected

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Perfect World (NASDAQ: PWRD) is scheduled to report fiscal third-quarter 2011 results today, November 21, after the closing bell. Global gaming is expected to see expansive growth in 2012, according to a poll of 1,150 gaming professionals at the Global Gaming Expo. And Perfect World recently announced a new joint venture with Nexon Korean Corp. to manage and operate online games in South Korea.

The consensus forecast calls for Perfect World to report earnings of $0.67 per share, which would be a 10.4% increase from the same quarter of last year. That EPS estimate is down from $0.69 some 60 days ago. And note that per-share earnings have fallen short of consensus estimates in two of the past six quarters.

Analysts also expect the company to report that revenues increased 13.6% from a year ago to $111.7 million. Looking ahead to the current quarter, revenues are anticipated to be 29.9% higher year over year. And for the full year, the forecast so far calls for revenues to be up 25.3%, with per-share earnings 21.7% higher than a year ago.

The Company

Beijing-based online game developer and operator Perfect World operates in China, the U.S., Japan, and Southeast Asia. Its games include Perfect World, Forsaken World and Battle of the Immortals. The company is also involved in the production and distribution of films, and it was founded in 2004. Its market cap is now $624.5 million.

During the three months that ended in September, the company announced that its ADS repurchase program was on track and said it would invest in a venture capital fund. It also held its annual general meeting of shareholders in Hong Kong. More recently, the company expanded into South Korea with the strategic alliance mentioned above.

Performance

Per-share earnings are expected to grow more than 12% over the next five years. Perfect World's P/E and PEG ratios are lower than the industry average. Its operating margin is much higher than the industry average, and the return on equity is a healthy 27.5%. The consensus recommendation of analysts is to buy the stock, and their mean price target of $24.00 per share is almost double the current share price.

But the share price fell after reaching a 52-week high of $29.10 back in April to hit a 52-week low of $10.70 in early October. Shares have traded mostly between $12 and $14 since mid October and the stock is currently down more than 47% year to date. Over the past six months, the stock has underperformed competitors Changyou.com (NASDAQ: CYOU), NetEase.com (NASDAQ: NTES) and Shanda Interactive (NASDAQ: SNDA), as well as the broader markets.

Action Items:

Bullish: Investors interested in exchange traded funds invested in Perfect World might want to consider the following trades:

  • Guggenheim BRIC (NYSE: EEB) is more than 23% higher than a recent 52-week low.
  • PowerShares Golden Dragon Halter USX China (NYSE: PJG) is more than 17% higher than a recent 52-week low.
  • First Trust ISE Chindia Index (NYSE: FNI) is about 13% higher than a recent 52-week low.

Bearish: Traders may want to consider these alternative positions:

  • Shanda Interactive (NASDAQ: SNDA) is more than 38% higher than a recent 52-week low.
  • NetEase.com (NASDAQ: NTES) is almost 31% higher than a recent 52-week low.
  • Changyou.com (NASDAQ: CYOU) is trading near its 52-week low.

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

Posted-In: analyst forecasts Changyou.com China stocksEarnings Long Ideas Short Ideas Previews Trading Ideas

 

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