Another Icahn Target, Should We Follow?

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As an active investor, Carl Icahn seems to be quite “active” these days. In the previous two posts, I have written about his attempt to acquire Oshkosh Corporation at $32.50 per share, which was considered inadequate by the Oshkosh current board of directors. Oshkosh board has responded with a poison pill, allowing existing shareholders to buy newly issued shares at a discount. In another position, Icahn has used different entities to execute long synthetic option strategy on Netflix, as he thought Netflix could be acquired at a large premium on the current share price. Recently, he just increased its stake in a video game developer and maker company, Take-Two Interactive Software (NASDAQ: TTWO), the developer of “Grand Theft Auto” video game. He boosted his stake from 8.7% to nearly 10% in the company. On November 5, he has acquired 500,000 shares at $11.02. Should we follow him into this position? Let’s find out.

Take-Two is in the business of developing and publishing interactive video games globally via two labels, Rockstar Games and 2K. There is customer concentration in Take-Two’s business, with 5 largest customers accounting for nearly 44% of total sales. The biggest customer is GameStop with 19% of total sales, then Wal-Mart, with 10% in fiscal year 2012. In the past 5 years, Take-Two has been a total disappointment for its shareholders. The share has declined by 35.6% during those 5 years. Year-to-date, Take-Two has lost more than 21% of its value. The stock’s beta is 1.61, indicating that the share is 61% more volatile than the average stock market.

Take-Two just released its Q2 quarter with strong growth. Its revenue was $273 million, a growth of 155% compared to the same period last year. It has narrowed its losses, from $47.4 million last year to $12.5 million this quarter. Its loss per share was $0.15, nearly one fourth of $0.57 loss last year. As of September, the stockholders’ equity was $484.5 million, cash on hand was $328.3 million, and the long-term debt was $325.6 million. It was a good thing to see the company had a net positive cash balance (after deducting interest bearing debt). However, Take-Two recorded huge goodwill and intangibles, of nearly $240 million. Its current tangible book value is now only $2.70 per share. Currently, Take-Two is trading at $11.03 per share. The market capitalization is $1 billion.

Compared to its competitors including Electronic Arts (NASDAQ: EA) and Activision Blizzard (NASDAQ: ATVI), Take-Two is the smallest company with $1 billion market cap, whereas the market cap of Electronic Arts and Activision Blizzard are $4.2 billion and $12.5 billion, respectively.

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>TTWO</strong></p> </td> <td> <p><strong>EA</strong></p> </td> <td> <p><strong>ATVI</strong></p> </td> </tr> <tr> <td> <p><strong>Net margin (%)</strong></p> </td> <td> <p>-19.9</p> </td> <td> <p>1.4</p> </td> <td> <p>18.5</p> </td> </tr> <tr> <td> <p><strong>ROIC (%)</strong></p> </td> <td> <p>-23.7</p> </td> <td> <p>1.8</p> </td> <td> <p>7.8</p> </td> </tr> <tr> <td> <p><strong>D/E</strong></p> </td> <td> <p>      0.7</p> </td> <td> <p>  0.2</p> </td> <td> <p>     0 </p> </td> </tr> <tr> <td> <p><strong>P/E</strong></p> </td> <td> <p>N/A</p> </td> <td> <p>78.1</p> </td> <td> <p>15.6</p> </td> </tr> <tr> <td> <p><strong>Dividend yield (%)</strong></p> </td> <td> <p>N/A</p> </td> <td> <p>N/A</p> </td> <td> <p>1.6</p> </td> </tr> <tr> <td> <p><strong>PEG</strong></p> </td> <td> <p>1.8</p> </td> <td> <p>0.5</p> </td> <td> <p>2.1</p> </td> </tr> </tbody> </table>

Activision Blizzard seems to be the best business in the industry, with an 18.5% net margin and 7.8% return on capital. In addition, the company does not employ any debt in the operation and it is the only company, which pays dividends among the three. The dividend yield is 1.6%. Take-Two is generating losses, employing the highest debt level compared to both Electronic Arts and Activision Blizzard. It also has a high PEG ratio, of 1.8x.

My Foolish Take

Even with Carl Icahn’s move to boost his stake in Take-Two, I would not feel comfortable initiating any position in the company at the moment. From the ratios, Activision Blizzard seems to be the best stock among the three for investors as it has the best business operating metrics. Investors might consider Electronic Arts for its growth, as it is undervalued compared to its potential growth, indicating by only 0.5x PEG ratio.  

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hoangquocanh has no positions in the stocks mentioned above. The Motley Fool owns shares of Activision Blizzard and Netflix. Motley Fool newsletter services recommend Activision Blizzard, Electronic Arts, Netflix, and Take-Two Interactive . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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