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THQ Looking Like Undisputed Gaming Champion

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Company sees best quarter since '07 -- and there's more to come.

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When THQ (THQI) signed its licensing deal with the UFC in early 2007, it couldn't have realized just how smart the move was. The sport of mixed martial arts was growing, but wasn't quite the juggernaut it is today.

Fast-forward to 2009, and the critically-acclaimed UFC 2009 Undisputed just sold 3 million copies in 3 months' time -- smashing analysts' expectations of 2 million units in one year.

In fact, Undisputed just drove THQ to deliver its best quarter since 2007, beating consensus estimates by a huge margin. With the UFC, THQ has found a new life force, and one is driving it out of the ground. There's simply no game franchise more important to any video-game company in the world right now, other than Take-Two Interactive's (TTWO) Grand Theft Auto.

The UFC itself is rapidly expanding internationally by holding events and signing television deals in new regions like Germany and Mexico. And due to some creative casting, the next season of the UFC's Ultimate Fighter reality show will be by far the highest-rated in history.

Plus, THQ is taking the UFC franchise to new gaming platforms, likely the Sony (SNE) PSP and Nintendo Wii. Though third-party Wii games are a total crapshoot, the fighting mechanics may actually work well with the Wii's motion controls.

It also doesn't hurt that Microsoft (MSFT) and Sony are likely to institute price cuts for their console by the holiday season, building a bigger installed base for THQ's most important franchise.

The day wasn't perfect -- second-quarter guidance was pretty darn lousy, and I'm not at all happy about the offering of $90 million in convertible notes, which is holding the stock down today. While THQ gave "general corporate purposes" as its rationale for the capital raise, it's likely to use the money to make acquisitions -- not an altogether bad idea given depressed industry multiples.

I'm not thinking very hard here: The UFC is booming, with ample room for growth, and THQ is Gorilla-taped to it. At 0.4 times sales with modestly growing revenues and an improving balance sheet, the stock is dirt-cheap -- especially given the potential for other upcoming THQ titles like Darksiders and Homefront to emerge as hits.
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Positions in TTWO, THQI
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