Billionaire Icahn Moving Back To Take-Two

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At the beginning of 2011, Carl Icahn owned nearly 10 million shares of Take-Two Interactive Software (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 this year, Icahn slightly increased the size of his position. A purchase recently disclosed in a 13D filing brings his total to 8.7 million shares (9.6% of the shares outstanding). While he and his investment team are likely already busy with their new position in 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 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 per share in that financial metric. The company also cut its guidance and expects roughly $.10 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, though growth opportunities also exist in Asian geographies. Take-Two trades at only six times forward earnings estimates. That sounds very optimistic for a company that 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; on the other side, 23% of the shares outstanding were held short as of the most recent data.

The closest peers for Take-Two are fellow publicly traded game publishers Activision Blizzard(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-- EA is valued $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.

Chinese game companies Changyou.com (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 for both companies 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 them we would make sure that it was a fairly small position.

Investors shouldn’t get too excited at gaming companies. In particular, Take-Two does not look like a good value compared to its peers. Activision Blizzard is probably the stock we’d feel most comfortable with.

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This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Activision Blizzard. Motley Fool newsletter services recommend Activision Blizzard, Electronic Arts, 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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