By Alex Gavrish, Etalon Investment Research; author of “Wall Street Back To Basics

activision blizzard

Activision Blizzard reports fourth quarter results

Activision Blizzard, Inc. (NASDAQ:ATVI), a leading game publisher, reported fourth quarter and full year 2013 results after February 6th close. The company reported better than expected net income and revenue, but provided a lower than expected income and revenue forecast for the first quarter of 2014 and upcoming fiscal year. Stock price reacted positively to the earnings report and jumped about 8% to $18.5 per share in after-hours trading. Despite lower than expected guidance for 2014, company is expecting to grow due to an attractive games pipeline with such franchises as Call of Duty, Skylanders, and Destiny.

Vivendi transaction

In October 2013 Activision Blizzard, Inc. (NASDAQ:ATVI) completed a share buyback transaction from its former majority shareholder Vivendi SA (EPA:VIV) (OTCMKTS:VIVHY). 429 million shares were repurchased by the company itself for a total amount of $5.8 billion while a group led by company’s CEO Brian Kotick and Co-Chairman Brian Kelly bought 172 million shares for a total amount of $2.3 billion. Total shares outstanding as of the end of 2013 quarter were 745 million shares, making management group the largest shareholder with a holding of 23% in the company.

Current valuation

Based on a February 6th closing price of $17.17 per share, Activision Blizzard, Inc. (NASDAQ:ATVI) had a market capitalization of $12.8 billion and a similar enterprise value of $13 billion. Based on fiscal 2013 full year results, Activision is valued at an EV/EBITDA multiple of x8.9 and P/E ratio of x12.7.  Company generated approximately $1.2 billion in free cash flow during 2013. This equates to a free cash flow yield of 9.3%. Activision has a small net debt of $200 million while cash and equivalents equal approximately $4.4 million or 34.7% of company’s current market capitalization. Activision declared an increased dividend of $0.20 (compared to $0.19 last year), implying a small annual dividend yield of 1.2%. It is reasonable to assume that with such large cash amount on the balance sheet (despite the fact that it is more leveraged currently), there are more initiatives in the company’s pipeline in the area of capital structure optimization, such as a special dividend or an additional share buyback program.

Reasonable valuation, strong free cash flow generation and an opportunity to join management (who now own a sizeable part of the company) make Activision Blizzard, Inc. (NASDAQ:ATVI) an interesting investment option.

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