Why Gaming Stocks Are Looking Better

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

Gaming stocks are looking better and worth going long after the latest quarterly results which have been anything but disappointing. Here is a closer look if Take-Two Interactive (NASDAQ: TTWO), International Game Technology (NYSE: IGT), and Electronic Arts (NASDAQ: EA) deserve investors’ money;

Take-Two Interactive sales

Take-Two Interactive is primarily a developer of games for consoles such as PlayStation, Xbox, Nintendo Wii, etc. The company develops games for personal computers and handheld devices too, but these activities account for less than 20% of its revenue. In the last 12 months, console gaming generated $975.9 million in sales out of total $1.21 billion. After a troubled first half in the last fiscal year, the latest two quarters for Take-Two have been underlined by profitable operations.

This was specifically true for the last quarter which saw revenue doubling to $299.5 million while bottom-line improved to a profit of $22.5 million from a loss of $66.8 million. On a yearly basis, Take-Two is still not profitable, but the stock price of $16, which is a mere 16% premium to sales, is not on the higher side. What makes Take-Two interesting is its prospects. The company says it expects to book earnings per share in excess of $2 on sales of at least $1.75 billion – a full 44.6% above the previous year. Analysts are buying this vision and Macquarie and BMO upped their target price reflecting at least 25% upside from here.

Electronic Arts is another console gaming software company which has found investors ready to lap up its shares. After a couple of unprofitable quarters and poor launch of one of its new games, credibility of Electronic Arts was under doubt but that changed with the fourth-quarter financial performance which was better than expected. The March quarter is usually the strongest of the four quarters and even though the company recorded lower sales during the quarter, it made up with profits of $323 million, wiping out losses of previous quarters.

On top of this, the company said its full financial year earnings will be ahead of Street expectations. This does not look out of place considering that Electronic Arts was recently awarded a lucrative contract to develop Star Wars games by Disney. While Electronic Arts certainly trails its larger rival Activision Blizzard in terms of popular game franchises, this latest development indicates the stock may finally be catching up.

Gaming stock of a different type

International Game Technology is another gaming company, but this company’s focus area is gaming hardware rather than software. The company deals in casino games, gaming equipment, and systems technology. In the second quarter of the current fiscal, the company reported 11% growth in revenue to $600 million while profit grew 26% to $78.2 million. While this is strong growth in itself, the effect is further magnified by the company’s share repurchase offer which caused a 38% growth in earnings per share during the latest quarter.

Since this is a slightly more capital intensive business, International Game Technology has a debt gearing of 1.47. This is a bit on the higher side, but the company generates enough profit to service interest outgo. In fact, its profit margin improved to 13% in the latest quarter, up from 11.6% last year. At a current price of $17.3, the stock trades at a forward price earnings ratio of 12.7 and offers a dividend yield of nearly 2%. Deutsche Bank has a buy call on the stock with a target price of $20.

Foolish bottom line

Overall, first-quarter results of these gaming stocks allude to better times ahead. While these are tough times for console gaming companies, especially Electronic Arts, old economy stocks such as International Game Technology offer a safer option to investors.

While Activision and Microsoft have been taking the headlines when it comes to console gaming, investors following the gaming sector would do well to also keep tabs on Electronic Arts. We can help. The Motley Fool's special report breaks down the risks and opportunities facing the company to help you decide if EA is right for your portfolio. Click here to get your copy now.

Jacob Wolinsky has no position in any stocks mentioned. The Motley Fool recommends 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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