It's Not a Perfect World, But It's Not That Bad Either
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Perfect World (NASDAQ: PWRD) stock has taken a serious beating in the last year or so. The company has lost 63% from it's 52 wk high and a recent and apparently false post about potential fraud caused the stock to lose nearly 30% and then recover about half of that. The company is being sold as though it's headed for the scrap heap of Internet gaming companies and the fact that the company is based in China has not helped matters. So what is there to like about this company? More then you would think actually.
Current Price: $10.75
P/E based on '12 earnings estimates: 3.89
Growth expected: 10.80%
The number that jumps out at me first is the tiny P/E ratio if they meet earnings expectations for '12. I know a lot of people are likely willing to stop there and say, 'look how bad they missed earnings estimates last time.' They might also say, 'why would you look at analysts estimates when they had that bad of a miss?' There is a good reason, and it's called the long term view. Perfect World did miss analysts estimates last quarter by a sizable amount, but how many people remember they beat estimates by a sizable amount in the two quarters prior? Looking at the last 4 quarters, on average Perfect World has missed earnings estimates by -6.7%. While investors don't generally like companies that miss estimates, this puts the large miss of last quarter in perspective. Also, keep in mind that the average estimate for '12 full year earnings has dropped by 16% from where it was a few months ago, and you have a company that could beat estimates going forward.
What else is there to like about Perfect World? How about the fact that the company has no long term debt, and carries about $2 a share in cash on the balance sheet? To find this you have to realize that Perfect World has Cash, Restricted Cash, Short term investments, and CD's that are all reported on different lines of the balance sheet. How about the fact that they have a $100 million share repurchase program that is ongoing? At current prices that $100 million (some of which has been used) would buy around 9 million shares which would represent a decrease of about 4% of the shares outstanding. I would also point out that the company expects 18-26% year over year growth in revenues for the 4th quarter. Perfect World also continues to expand where it's games are available licensing them to different countries outside of China. Perfect World also recently acquired Cryptic Studios, a U.S. based company, which brings 3 new games to their portfolio.
If the company can meet revised earnings estimates and garner even a PEG of 0.75, the stock would be at $22. This would still leave the stock technically undervalued, but more in line with reality. I don't know about you, but a 104% gain seems worth the small amount of risk at this point. Sometimes you don't need a Perfect World; you just need above average performance.
The Motley Fool has no positions in the stocks mentioned above. MHenage owns shares of Perfect World and owns $14 Jan 12 Covered Calls. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.