Great earnings today! Company has beaten estimates for 6 consecutive quarters, and the future looks very bright.
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Friday August 25, 1:30 am Eastern Time
individualinvestor.com
Take-Two Tops Estimates
Research Analyst: Will Frankenhoff (08/25/00)
It came as little surprise. Take-Two Interactive
(NASDAQ:TTWO - news) Q3 (July) results that once again beat
analyst expectations on both the top-line (barely) and the bottom-line (more than barely).
Revenues for the quarter of $71.5 million were slightly above consensus I/B/E/S expectations of
$71.2 million and 12% ahead of last year's quarter. Earnings came in at $0.14 per share (excluding
one-time charges), up 16% from last year and 27% ahead of the $0.11 I/B/E/S estimate.
Margin expansion continues to be impressive as gross margins came in at 44%, up significantly from
31% in last year's quarter, powered by a greater mix of higher margin PC title sales (53% vs. 43%).
Operating margins increased as well, rising to 10.8% from 6.6% in the prior year's quarter.
As noted in a recent update, competitors such as Activision (Nasdaq: ATVI - news) and THQ
Interactive (Nasdaq: THQI - news) issued earnings warnings nut have since seen the shares rebound
nicely. In contrast, Take-Two has beaten expectations for six consecutive quarters by an average
33%, and grown earnings during the same period by an average 71%. Despite this track record, and
a pre-announcement that earnings would meet or beat estimates (which they did, obviously), the
company's stock has barely moved since its recent inter-day high of $13, reached on July 6th. In
fact, unlike its competitors, the stock has actually declined 6% during the period.
We're at a loss to explain this disparity. While we realize investors might penalize Take-Two for its
lower-margin distribution business which contributed 41%, or $29.3 million, of total revenue, we
believe that the stability of the business is a big plus (as evidenced by Take-Two's success while
others floundered). In addition, the company is more capable of distributing new titles.
Another possible explanation: a lack of institutional coverage. Aside from Individual Investor Group,
there are only two, relatively small, houses that follow the company compared with more than five
for Activision, THQ, and Electronic Arts (Nasdaq: ERTS - news).
Whatever the case may be, we still find shares of Take-Two a compelling investment. Not only are
they trading at a mere 11 times forward estimates of $1.16 (compared to an average forward
multiple of 16 for ATVI and THQI), but the company has now indicated that it expects to garner
more than $250 million from titles related to the release of Sony's Playstation2 in late October in the
U.S. and late November in Europe.
Considering that Take-Two is expected to generate a total of $385 million this year (without
Playstation2), this represents a significant increase in revenue, and given the company's operating
history, should generate a commensurate increase in earnings. We would like to note that current
estimates don't take into account this recent guidance.
Given the compelling valuation and the upside potential inherent in the soon-to-be released
Playstation2, we reiterate our buy rating on shares of Take-Two. Get in before institutional investors
discover this gem.
Updated August 54, 2000 with TTWO trading at $12.25
Recommended 12/10/99 at $11.25
(Magic 25 is a diversified portfolio of stocks that Individual; Investor believes will outperform the
market over the course of the year. In 1999, the Magic 25 portfolio was up 79.3%. On average, the
portfolio has risen 31.6% annually.)
For more in-house professional stock analysis and commentary, visit us at Individual Investor
Online.
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