After a Brutal Year, the Dog Days Are over for Activision Stock

It's more than wishful thinking, Activision stock has a future

A recent article from the Globe and Mail, Canada’s national newspaper, got me to thinking about Activision Blizzard (NASDAQ:ATVI), and more important, Activision stock.

activision stock atvi stock
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How so?

Wickham Investment Counsel portfolio manager Sean Pugliese, a regular contributor to the paper’s Number Cruncher column, took a look at the biggest “Dogs” of the S&P 500 over the past year.

Focused on safety and value, Pugliese selected only those S&P 500 companies that had a total return over the past 52 weeks of -30% or worse through the middle of February.  Activision was one of 20 companies on the list.

Factors that Pugliese looked at included dividend yield, debt/equity ratio, P/E, and earnings momentum. Given the screen has a safety and value focus, lower debt/equity ratios and positive earnings momentum are the preferred metrics for a rebounding stock.

Activision Blizzard’s debt/equity ratio is 23.5% with earnings momentum of 15.6%. Both figures make it an attractive rebound candidate according to Pugliese. Of the 20 stocks on the list, ATVIs debt/equity ratio is the fifth lowest; its earnings momentum is the highest according to data provided by Eikon and Wickham Investment Counsel.

That’s excellent news.

Is Activision Heading in the Right Direction?

About a week before Pugliese’s Feb. 20 article about the “Dogs” of the S&P, I was heaping praise on ATVI management for taking the steps necessary to ensure its business continued to grow.

Never easy, CEO Bobby Kotick announced that 8% of its staff or 750 people would lose their jobs. The restructuring would see the money saved from 750 paychecks reinvested in its core and incubation development teams. In 2019, it plans to increase spending by 20% in this vital area of its business.

Free-to-play games have taken the industry by storm. While Activision is playing catch up, it’s better late than never.

A big part of a CEOs job is allocating capital. 

In the case of Activision, the fact that free cash flow is slowing suggests that things are going to get worse before they get better. Pulling the plug on 750 jobs is the responsible thing to do for both shareholders and the remaining employees.

I finished my article by recommending Activision stock at current prices.

Since then, ATVI has gone sideways, remaining in a tight range around $44. If the company is going to rebound, it hasn’t shown any inclination over the past month to do so. By comparison, the S&P 500 is up almost 3% through March 13.

The Bottom Line on Activision Stock

The tricky part about earnings momentum is that it’s based on the change in annualized earnings from quarter to quarter. In the 12 months ended Dec. 31, Activision’s adjusted EPS was$2.72 a share. In the 12 months ended Sept. 30 it was $2.31 a share, an increase of 17.7%, 210 basis points higher than the number in the Globe and Mail.

That’s got to be viewed in a positive light if you own ATVI stock.

However, the company’s guidance for 2019 is $2.10 a share, 23% lower than in the past year, a company record. Net, net, it’s a step backward.

Not to worry.

In situations like these, it makes sense to be conservative in your outlook because you don’t know the exact cost of the layoffs or the amount of traction gained from the 20% increase in development costs. Better safe than sorry.

Over the next 6-12 months, I do see Activision’s moves, both the defensive (job cuts) and offensive (20% increased spending) doing the trick for Activision stock.

At that point, you can be sure its earnings momentum will rebound as well.  

As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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