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THQ Inc. (NASDAQ: THQI) is still trying to get its ship turned around in the right direction and the company’s stock was under fire this morning, understandably if you are just a headline reader.  In its updated core games release schedule, the company announced that its Red Faction® ArmageddonTM is now slated for release in May 2011.  Despite that this pushes a turnaround story back is one thing, but THQ may actually be the best buy with the most upside of all peers in the video game sector.

Based upon the delay the company now expects to report its fiscal-2011 revenues of $800 to $825 million and it expects a non-GAAP loss of -$0.10 to -$0.20 EPS.  Thomson Reuters had estimates already at a loss and the consensus was -$0.03 EPS and nearly $845.5 million in revenues.  The big wild card for many investors is how this will affect the Fiscal-2012 (March-end) where Thomson Reuters has estimates of $0.31 EPS and $923.7 million in revenues.

THQ also gave its line-up for next year via its fiscal 2012 schedule: Warhammer® 40,000® Space Marine® in Summer-2011, MX vs. ATV® Alive™ in Spring-2011, the latest edition of Saints Row® in Fall-2011, a fighting game based on the World Wrestling Entertainment® in Fall-2011, and a fighting games based on the Ultimate Fighting Championship® in Winter-2012.

THQ has suffered alongside an industry that was supposed to be at least a quasi-winner of the recession that ended up being a loser.  It turned out that laid-off couch potato video game addicts either did not buy more new titles or they opted for used games.  GameStop Corp. (NYSE: GME) trades at the lowest forward P/E ratios we have seen with a ratio of under 7-times blended 2011 and 2012 (Jan-end) estimates.  Best Buy Co. (NYSE: BBY) and Amazon.com Inc. (NASDAQ: AMZN) are large enough and now competing enough in the used-game markets that Wall Street is scared that GameStop could get gored.  And new game console sales are very slow, which in-turn generally limits demand for endless new game titles.

Electronic Arts inc. (NASDAQ: ERTS) has been a dead stock since the end of 2008, in part because of its warnings that seem to come with each earnings release.  EA has also lost its pole-position as the largest video game seller is now Activision Blizzard, Inc. (NASDAQ: ATVI) with its World of WarCraft, Call of Duty, Guitar Hero, DJ Hero, and more.  Activision Blizzard has not exactly set any gang-buster stock performance, but it has ‘only’ lost about one-third of its value from the peak versus Electronic Arts which has lost more than two-thirds of its value from the peak.  As far as how THQ fits in on performance, this was a $35 stock in mid-2007.  Shares are now close to $3.70 and its 52-week trading range is $3.33 to $8.29.  Take-Two Interactive Software Inc. (NASDAQ: TTWO) recently managed to raise guidance as expectations were so low and Take-Two has been a takeover candidate itself before.  When THQ is back and delivering, it is feasible that the same scenario could come there.

Is there at least some added disappointment in this morning’s warning from THQ?  Sure.  It is also mostly baked into the cake if you look through the books.  As noted, a loss was already expected.  Now the market cap is a mere $251 million, which means that if any video game sector consolidation comes back that THQ would likely find itself as prey rather than predator.  Its June 30 balance sheet listed more than $225 million in cash and short-term investments versus long-term debt of $100 million and $78.7 million in ‘other’ longer-term liabilities.  Shareholder equity was $292 million and even its net tangible assets came to $182.3 million.  In short, there is what could easily be an implied valuation floor in the stock.

THQI is not one of those endless growth stocks.  The catalysts are not likely immediate other than the notion that it is a “cheap stock” if value investors want to consider video games, but its coming video game line-up, its low valuations, and even its new upcoming uDraw peripheral system for Nintendo’s Wii in time for the holiday season should all help offer share support here for those investors who can look beyond the headlines of just a few days or weeks.   The company did maintain that it expects to “grow net sales and generate significant earnings and cash flow in fiscal 2012.”  If today’s news was so bad, the drop of less than 1% at $3.70 would have likely taken shares closer to a 52-week low rather than just a marginal drop.

JON C. OGG