This year has been incredibly frustrating for me, which sounds
idiotic given the
(INDEXSP:.INX) is up 26%. It seems like everything I'm long has
gone sideways to down while everything I don't own keeps going up
every single day.
) is one of those names for me. The stock is $17, up from around
$12 at the start of the year. But, for the last six months the name
has gone sideways. I didn't have the good fortune to be in the name
from January, so now I'm dealing with reality.
Reality is, on October 29, Take-Two blew out its second-quarter
2014 revenues, EPS, and forward guidance for the full year. Revenue
grew to $1.27 billion vs $288 million year-over-year (a record
number), EPS came in at $2.49 vs. $0.11 YoY, and Cash &
Equivalents on hand were ~$662 million (40% of market cap). Did I
mention there's a full $1 billion in accounts receivable? And it's
due within 60 days. That will take the cash on hand equal to the
current market cap. Think about that for a minute. The company also
redeemed a convertible note one year early, lowering its long term
debt to ~$445 million. Forward guidance for 2014 (ending March) was
boosted to $3.50 - $3.75 per share, making the company's P/E ratio
a measly 4.8x. Excluding its current cash, that number falls to
2.9x. By year end that number will be 1x.
Grand Theft Auto 5
has been a huge hit; 29 million units were sold by the end of
October. Credit Suisse had raised estimates to 30.5 million units
from a previous estimate of 20.25 million. The real number could be
north of 40 million units.
Take-Two also has a lot of new titles coming to market soon and
even more for the next fiscal year.
I haven't even mentioned microtransactions for
which have been a big success for other games in the Take-Two
Given the cash on hand and success of its titles, Take-Two is ripe
to be taken over.
The two big names who could do that are
). Both are much, much larger than Take-Two and could easily absorb
such a deal.
At first glance, it appears that Activision is better positioned
for such a move with its $11.75 billion market cap, $4.5 billion in
cash (38.65% of market cap), and only $2.2 billion of long-term
debt. Add in that its games, including
Call of Duty
are performing well and it makes sense.
Electronic Arts is about 4.5x larger than Take-Two and has cash
level of ~1.5 billion, which is almost equal to Take-Two's market
cap. With only $570 million in debt, Electronic Arts could easily
issue new debt or equity to finance a takeover.
The big difference between Electronic Arts and Activision is that
the former is having problems.
Tiger Woods dropped it
at the end of October.
sales have been very disappointing with retailers like
) cutting the retail price drastically a little more than a week
after its release.
have been weak as you can read
, and there won't be another release of the game in calendar 2014.
NBA Live 14
rated as a total flop
, there won't be any
games based on upcoming sequels, and sell-through for current games
-- including normal big sellers like
-- was described as "soft" during the conference call.
Even if Take-Two doesn't get taken out, the name trades as cheaply
as can be found, and business is quite strong and looks to stay
that way. Of course, stocks can trade stupidly. It happens often.
But there's a large margin of safety in this name that gives me
comfort in buying now and on moves lower.