Is Take-Two Still a Bargain?

With shares of Take-Two Interactive Software (NASDAQ:TTWO) trading at around $14.30, is TTWO an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Take-Two is soaring today. Q3 EPS came in at $0.66, which was a big improvement over the same quarter last year when EPS came in at $0.16. Net revenue was up 76 percent to $415.8 million. Guidance was also strong. Furthermore, Take-Two plans on repurchasing up to 7.5 million shares.

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The big news was “NBA 2K13.” There have already been 15 million copies shipped. There are two reasons for the outstanding results. One, Take-Two really focused on quality with this game, which has led to exceptional reviews from gamers. Two, Electronic Arts Inc. (NASDAQ:EA) cancelled its rival basketball title. The best part about this situation isn’t just the present, but the future. Now that Take-Two will be stealing some basketball gaming enthusiasts, it will have an opportunity to lock up that market going forward. “Borderlands 2” has also performed well. The next “Grand Theft Auto” game is due out on September 17. If this release goes well, Take-Two will find itself firmly in the driver’s seat.

Let’s take a lot at some important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio for Take-Two is normal, yet it’s weaker than the debt-to-equity ratios for Electronic Arts and Activision Blizzard (NASDAQ:ATVI). That said, it’s nothing to worry about. And the balance sheet is healthy.

Debt-To-Equity

Cash

Long-Term Debt

TTWO

0.67

$328.28 Million

$325.54 Million

ATVI

0.00

$3.36 Billion

$0

EA

0.28

$1.49 Billion

$554.00 Million

 

T = Technicals on the Stock Chart Are Strong     

The past year as a whole has been poor for Take-Two, but there has been renewed momentum over the past six months. It should be noted that Activision Blizzard is the only company of the three that offers yield, which is 1.50 percent.

1 Month

Year-To-Date

1 Year

3 Year

TTWO

17.21%

29.88%

-12.11%

53.93%

ATVI

7.34%

12.90%

-1.27%

22.58%

EA

13.71%

16.53%

-10.95%

-1.52%

 

At $14.30, Take-Two is currently trading above all its averages.

50-Day SMA

12.27

100-Day SMA

11.67

200-Day SMA

11.14

 

E = Earnings and Revenue Have Been Inconsistent           

Earnings and revenue have been inconsistent on an annual basis.  

2008

2009

2010

2011

2012

Revenue ($)in millions

1.23B

701.06

762.94

1.14B

825.82

Diluted EPS ($)

1.25

-1.83

-1.58

0.56

-1.31

 

We already know what happened this quarter. Now let’s take a look at previous quarters.

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in millions

107.03

236.32

148.08

226.14

273.08

Diluted EPS ($)

-0.57

0.16

-0.79

-1.30

-0.15

 

T = Trends Might Support the Industry

This is one of the few industries where it’s difficult to determine if trends are positive or negative. On one hand, the consumer is weak, especially when it comes to discretionary income. And there is a belief that people will turn more to online games. On the other hand, there have been encouraging signs when it comes to sales, and CEOs within the industry seem to be genuinely confident in the future.

When it comes to sales, the difference between now and the past is that only the best titles perform well. There is definitely more of a focus on quality now, and companies within the industry are being even more meticulous than in the past when it comes to details. If they’re going to invest money and time in a game, then they’re going to make sure they get it right. As far as cheaper online and mobile games taking over, if that were going to happen, it would have happened a long time ago. The biggest concern is a weak consumer, not online gaming.

Conclusion

Take-Two has several negatives, which include weak margins and poor cash flow. However, the positives outweigh the negatives. Between taking control of the basketball gaming market and a new version of “Grand Theft Auto” coming out later in the year, there is a lot of excitement surrounding Take-Two right now. And excitement tends to move a stock higher.

The answer to the question in the title is yes. Take-Two is still a bargain. In addition to the factors covered above, the Forward P/E is only 6.31. Take-Two is an OUTPERFORM.

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