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Take-Two Interactive - Thoughts From Fifth and Dover

Recs

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September 12, 2010 – Comments (2) | RELATED TICKERS: TTWO , ATVI , EA

Because we are simple working people without three-piece suits or graduate degrees in finance, and because we also think that pre-popped freeze dried popcorn would be a poor idea, we get quite a bit of e-mail during the course of any given week asking us our thoughts on specific companies.

The overwhelming requests are from clients that read something positive about a company on an investing website. This week was no exception.

It seems that a website recommended buying game manufacturer Take-Two Interactive Software, Inc. (Nasdaq: TTWO). This recommendation prompted a number of e-mails to us all wanting to know if investments in Activision Blizzard, Inc. (Nasdaq: ATVI) or Electronic Arts, Inc. (Nasdaq: ERTS) should be sold.

Alas, we simply do not recommend the buying or selling of securities, mainly because we are not qualified to peform that sort of investment function but more importantly because that is simply not the business we engage in.

What we do suggest and have always suggested, is that before an investment is undertaken the reason for the investment is fully considered.

Several of the questions we suggest investors asked themselves before they invest are:


1.What is it that you expect an investment in this company to do for you?

2.When will you need the money from an investment in this company?

3.What is your estimate of the value of what you are buying?

4.What is your capitulation point should the investment not work out?

5.Does your spouse or significant think this is a good investment?

As we said, we do not recommend the buying or selling of securities. Instead, we try and provide a basis for those parties interested in a particular security to further their own research.

Basis
Financial information related to Take-Two Interactive Software, Inc. contained in this report, is based on the company's most recent SEC 10-K filing for year ending October 31, 2009, as filed with the Securities and Exchange Commission on December 18, 2009.

What They Do
The company is a global publisher, developer and distributor of interactive entertainment software, hardware and accessories. The company’s publishing business consists of Rockstar Games, 2K Games, 2K Sports and 2K Play publishing labels.

The company develops, markets and publishes software titles for gaming and entertainment hardware platforms, including Sony’s PLAYSTATION3 (PS3) and PlayStation2 (PS2) computer entertainment systems; Sony’s PSP (PlayStationPortable) (PSP) system; Microsoft’s Xbox 360 (Xbox 360) video game and entertainment system; Nintendo’s Wii (Wii) and DS (DS) systems, and for the personal computers (PC) and Games for Windows.

The company also develops and publishes titles for digital distribution via Sony's PlayStationNetwork (PSN) and Microsoft's Xbox LIVE Marketplace (Xbox LIVE) and Xbox LIVE Arcade (XBLA), as well as digitally offers its PC titles through online download stores and services, such as Steam.

The company has also begun to develop and publish titles for the iPhone and iPod touch. In March 2010, SYNNEX Corporation acquired substantially all of the North American assets of Jack of All Games, Inc., a distributor of video game hardware and software in North America, and a wholly owned subsidiary of Take-Two Interactive Software, Inc.

Short-Term Investment
The stock closed recently at $9.57 with resistance at $9.89, a 3% increase from its recent close and support at $9.39, a 2% decline from its recent close.

The shorter term trend for the stock is down, with the Stochastic currently moving from Overbought to Oversold, telling us, at least at this time, a short-term investment is not in our best interest.

Long-Term ( 5 Year Hold) Investment
The company's current fiscal year ends next month, and while we did take a look at their last several quarters, we focused mainly on their FY09 financial data, since it is the most current audited financial information.

What we found was simply unimpressive. Goodwill and Intangibles make up more than 30% of Total Assets, which changes the company's $6.18 Book Value to $2.28 when these two items are backed out of Total Assets.

In addition, we feel the company simply has to much Debt relative to Sales and note that in such a tough economic environment, servicing their debt, may become harder to do, especially since long-term debt increased for FY09 by almost $90 million.

We were also not overly impressed with the company's FY09 Free Cash Flow of $0.08 per share. It just seems to us that with the company's published titles, Free Cash Flow should be considerably higher and caution investors to pay close attention to this metric going forward.

Valuations
Based on our review of the company's FY09 financial information, our Reasonable Value Estimate for this stock is between $12 and $15.

To many investors, the stock will appear attractive since it is currently trading at about 2 times Book Value.

However the stock is also trading at 124 times FY09 Free Cash Flow, with a Trailing Twelve Month PE of 126. Not exactly what we consider cheap.

Market Advantage
Based on our valuation work for this stock, we believe that the odds of reaching our Reasonable Value Target are currently 8 to 1 against the investor.

Final Thoughts
Investment decisions should never be made in a vacuum. All reasonable care should be given to what a particular investment is intended to do for your portfolio.

The same is true of stock recommendations. Many stock recommendations are made with the best of intentions and come from websites operated with the highest of integrity.

But make no mistake. All of them, including our own little blog site, are there to make money. Free stock recommendations offered by many sites are only enticements, intended to get the reader to click on a link or subscribe to a newsletter that automatically renews year after year.

So instead of worrying about the recommendations of a website, we think investors should spend their time worrying about the type of shoes a mosquito might wear will driving to Tipperary, since to us driving mosquitoes and website stock recommendations are are one in the same.

Wax

Worksheet
To download the free Wax Ink Take-Two worksheet, please click here.

2 Comments – Post Your Own

#1) On September 13, 2010 at 4:48 PM, mugwump67 (58.57) wrote:

You're using FY09 info when in they are in their FY10 4th quarter and have raised guidance to a profit for the year, forecast a profit for next, and I can't find a recent quarter where they haven't beaten analyst estimates.

I've seen the disclaimers on the website and worksheet.  Is this some sort of prank?

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#2) On September 13, 2010 at 8:22 PM, wax (97.03) wrote:

mugwump;

No prank at all. Forecasts are no different than pro forma financial data as far as we are concerned.

We did look at their first 3 quarterly statements and feel the company may be beat FY09 sales numbers, but not by much.

If FY10 sales numbers do indeed come in similar to FY09 numbers, then to us, profit numbers should come in about on par with FY09 profit numbers as well.

Should that occur, what is it that will sustain a move upward in the stock price?

Yes, the price may move higher as the company's last quarter ends and the guess work starts regarding FY10 earnings. But what happens should the company's year over year earnings come in flat compared to FY09?

To us there simply is no way to sustain a move to higher stock prices based on the FY10 data we found.

As stated, we only use 10K data because it is audited financial data that allows for a more complete financial picture of a company.

Since it is our money we are investing, and since an average trade for us is 1000 shares plus, we simply prefer any advantage we can garner.

We are glad the company has beaten analyst estimates and hope that trend continues. Just as we sincerely hope that if you own the stock, the investment serves your financial needs for many years to come.

However in the end, our business is to determine what WE believe is a reasonable value for the stock based on verifiable financial data, and to provide our thoughts on that financial data as it is applicable, to the investors we serve.

Hope this puts to rest any concerns you may have had about our work being a prank. We assure you it is quite real.

Wax

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