This series , brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, our headlines feature higher price targets for big tech companies Apple Inc. (NASDAQ:AAPL) and Texas Instruments Incorporated (NASDAQ:TXN), but it’s …
A downgrade for Take-Two
Shares of video-game maker Take-Two Interactive Software, Inc. (NASDAQ:TTWO) are off more than 5% in early Wednesday trading after analysts at Pacific Crest warned that investor expectations for a new round of video-game console releases have gotten overheated.
Microsoft, Nintendo, and Sony are all coming out with new hardware and, lately, that’s made a lot of investors optimistic about the chances for more software sales from the games makers, as well. Problem is, Pacific Crest worries that expectations will deflate once all the new consoles actually come to market, and investors get a chance to see the sales numbers for the games that will run on them. The analyst is predicting a “correction” in the gaming industry — and sees Take-Two Interactive Software, Inc. (NASDAQ:TTWO) bearing the brunt of it.
Pacific Crest is pulling its outperform rating from the stock, and downgrading to sector perform. Is it right to do so?
Opinions can, and will, differ, but from where I sit, Pacific Crest’s decision looks prudent. Right now, Take-Two Interactive Software, Inc. (NASDAQ:TTWO) shares sell for a lofty 76 times earnings, and a less-expensive sounding, but still pricey, 44.5 times trailing free cash flow. Yet, the consensus of analysts who follow the stock is that — even with a bounce from the release of the consoles — Take-Two Interactive Software, Inc. (NASDAQ:TTWO) is only capable of growing its earnings at about 12% annually over the long term. That hardly seems fast-enough growth to justify a 44x multiple on the stock, much less a 76x multiple. And, with Take-Two paying no dividends either, I just don’t see any good argument in favor of owning the stock at these prices.
Long story short: Downgrading to perform was the least Pacific Crest should have done to its Take-Two Interactive Software, Inc. (NASDAQ:TTWO) rating. Individual investors might want to go a step further, and sell before the news gets worse.
Texas Instruments Incorporated (NASDAQ:TXN) tripped up
In somewhat brighter news, Texas Instruments Incorporated (NASDAQ:TXN) released new earnings guidance yesterday, which showed management more confident that it will exceed the low point on its guidance for this current fiscal third quarter 2013 — but less confident that it will hit the high point of its earlier range.
Management is now predicting it will earn between $0.51 and $0.55 per share on revenues of from $3.15 billion to $3.29 billion. These numbers convinced analysts at FBR Capital to up their valuation on the stock to $36 today… but did not convince the analyst to remove the underperform rating.
Nor should it.
With a 9% projected earnings growth rate, Texas Instruments Incorporated (NASDAQ:TXN) shares cost far more than they’re worth at 22 times trailing earnings. And, even if TI hits its new guidance, and achieves consensus forecasts for $1.94 per share in profits this year, that will still leave the stock selling for nearly 21 times earnings. So there’s really no joy in Texas Instruments Incorporated (NASDAQ:TXN)’s promise that things will work out basically as it planned back when it released Q3 guidance two months ago.