Icahn Moving Back To Take-Two

ICAHN CAPITAL LPAt the beginning of 2011, Carl Icahn owned nearly 10 million shares of Take-Two Interactive Software, Inc. (NASDAQ:TTWO), a PC and video game company that publishes games such as Grand Theft Auto and BioShock. By the end of the year he had cut his stake to 7.3 million shares. However, during the second quarter of the year Icahn slightly increased the size of his position and a purchase recently disclosed in a 13D filing brings his total to 8.7 million shares (9.6% of the shares outstanding). Research more of Carl Icahn’s investing activity. While he and his investment team are likely already busy with their new position in Netflix (read our article on Icahn buying Netflix), they seem to think that there is opportunity in the digital entertainment theme at Take-Two as well.

Down 30% in the last year, Take-Two Interactive Software, Inc. is currently hovering around a $1 billion market cap. In its second fiscal quarter (which ended in September), the company reported that revenue had more than doubled compared to the same period a year earlier, largely due to a more attractive mix of titles. This included a large increase in revenue from digital content, which is becoming increasingly important in the industry. Losses from continuing operations shrunk, though Take-Two still reported a loss of 15 cents per share in that financial metric. The company also cut its guidance and expects roughly 10 cents per share in (non-GAAP) net income for the fiscal year.

That would place Take-Two at a very high current-year P/E multiple, but investors, Wall Street analysts, and apparently Icahn all believe that the company’s fortunes will improve in the next few years. The U.S. gaming industry has been soft for some time, and may recover; growth opportunities also exist in Asian geographies. Take-Two Interactive Software, Inc. trades at only 6 times forward earnings estimates. That sounds very optimistic for a company which is currently unprofitable, and so we’re hesitant of buying until we see better operating results. Glenview Capital, managed by Larry Robbins, owned 5.2 million shares of the stock at the end of June (find more stocks that Glenview Capital owns); on the other side, 23% of the share outstanding were held short as of the most recent data.

The closest peers for Take-Two are fellow publicly traded game publishers Activision Blizzard, Inc. (NASDAQ:ATVI) and Electronic Arts Inc. (NASDAQ:EA). These companies’ stocks are also down since November 2011- EA has lost nearly half of its value- but they are still considerably larger than Take-Two in terms of market capitalization with EA valued at $4.4 billion and Activision Blizzard at $12.5 billion. They also had bad quarters according to their most recent report, with revenue down relative to a year earlier. Both trade at 11 times forward earnings estimates, based on strong growth expectations (particularly at EA). Of the three, Activision Blizzard looks like the best buy but even it has a trailing P/E of 16 with a very questionable industry outlook- investors should probably avoid it as well unless they want to try pairing it with one of the other two.

Chinese game companies Changyou.com Limited (NASDAQ:CYOU) and Shanda Games Limited (NASDAQ:GAME) can also be compared to Take-Two. These two companies are very attractive on a quantitative basis- the trailing and forward P/Es at both all come in at 5- though as with any Chinese company it is important to do extra due diligence. In their most recent quarter, Changyou reported strong growth in both revenue and earnings; Shanda had a somewhat lower net income off of a flat top line. They seem to be doing better than their American peers, and look attractively priced based on their quarterly report, but even if we did buy we would make sure that it was a fairly small position.

We think that investors shouldn’t get too excited at gaming companies. In particular, Take-Two does not look like a good value relative to its peers and if anything Activision Blizzard is probably the stock we’d feel most comfortable with.

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