PEG Ltd. - Value Ltd. ( CYOU ) has been beating quarterly earnings estimates for years now. Most recently, this Chinese provider of online video games topped the Zacks Consensus Estimate by 6.82% in its third quarter. Changyou also paid a special cash dividend of $1.9 per share.

With a forward price-to-earnings (P/E) multiple of just 5.4 and a low price-to-book (P/B) multiple of 2.7, CYOU looks like a solid value pick.

Impressive Q3 for Changyou

On November 5, 2012, Changyou announced third quarter earnings of $1.41 per share, comfortably surpassing the Zacks Consensus Estimate by 9 cents and the year-ago quarter by 23 cents. Averaging the past four quarters, this Zacks Rank #1 (Strong Buy) has surprised by around 15%.

Revenue grew 29.0% year over year, as online game revenues and online advertising revenues grew 30.0% and 32.0%, respectively. Registered accounts shot up 41.0% year over year to 223.5 million. The revenue result also surpassed the Zacks Consensus Estimate.

The upcoming launch of Battlefield Online (the beta testing of the online game started in November 2012) is also a big positive. Battlefield is a popular first person shooter (FPS) game owned by Electronic Arts Inc. ( EA ). Changyou licensed the game to release its Chinese online version.

However, accounting for higher operating expenses to promote four new online games and the release TLBB's (Tian Long Ba Bu - a popular Chinese novel based game) expansion pack, Changyou guided to a sequentially softer fourth quarter.

Earnings Estimates

Over the past 90 days, the Zacks Consensus Estimate for 2012 advanced 3.6% to $5.21 per share, while the Zacks Consensus Estimate for 2013 increased 3.3% to $5.67.

Impressive Valuation

In addition to low P/E and P/B multiples, the stock looks attractive even on a price-to-sales (P/S) basis. Its P/S multiple is 2.7, much lower than the industry average of 4.4.

Moreover, Changyou's price/earnings growth (PEG) ratio of just 0.45 indicates that the stock is undervalued given the expected growth rate of 12.0%. A P/E below 15.0, a P/S ratio less than 1.0 and a P/B ratio under 3.0 generally suggests a value stock.

The return on equity (ROE) also looks attractive. It has a trailing 12-month ROE of 46.1% compared with the industry average of 22.7%.

Historically, share prices have shown a positive correlation to earnings growth. Therefore, the current estimate trends indicate that they are headed upward.

In 2003, Changyou started its operation as a business unit under online games provider Sohu Inc. ( SOHU ) but began to operate separately from 2007. Its flagship games are TLBB, DDTank, Duke of Mount Deer; Licensed Blade Online, Blade Hero 2, Da Hua Shui Hu, Zhong Hua Ying Xiong, Legend of Ancient World, Immortal Faith, and San Jie Qi Yuan . Its employee strength is 3,297 and the company has a market capital of $1.61 billion.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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