Time For a Second Look at Take-Two?

Take-Two didn’t just surpass analyst’s expectations for its fiscal fourth quarter yesterday; it crushed them. And in the process, it did something observers and investors have been hoping it could pull off for a decade: It turned an annual profit in a year with no new “Grand Theft Auto” in its catalog.

Screen capture of "Red Dead Redemption"
Source: Rockstar Games
Screen capture of "Red Dead Redemption"

It’s a monumental achievement for a company that has been accused for years of being a one-trick pony. And it has investors wondering if the time has come to reconsider investing in Take-Two .

Analysts are certainly happy with the company. Edward Williams with BMO Capital Markets raised his 12-month price target on the stock from $12 to $14.

And Wedbush Securities’ Michael Pachter, who has been critical of Take-Two for some time, noted that “the company appears to be on the path to consistent profitability”.

Shares were up nearly 10 percent – to a 52-week high - in mid-day trading Friday on the strength of the earnings. Late Thursday, Take-Two reported net income of $53.8 million, or 58 cents per share, compared to a loss of $23.5 million, or 30 cents per share, for the same period last year. Analysts were expecting earnings of just 31 cents per share.

The strong numbers came alongside a robust lineup of games in 2010, including “Red Dead Redemption” (which has shipped over 8 million copies to retailers) and “NBA 2K11” (which has shipped 3 million copies).

And next year is looking just as strong.

“[‘Red Dead Redeption’] presents a difficult comp next year, but we believe that even without a ‘GTA’ release, the company will generate a profit in its new FY:12,” says Pachter. “We are confident that Take-Two will release ‘GTA’ in either late 2011 or early 2012, in addition to BioShock Infinite in 2012, and think the company can generate sustainable earnings growth in each year if release timing is right.”

Among the titles Take-Two has confirmed for 2011 are “L.A. Noire,” the long-in-gestation “Duke Nukem Forever” and a remake of gamer favorite “Xcom”. (Missing in action, though, is the third installment in the “Max Payne” franchise, which was originally slated for fiscal 2010, but moved out of the year in June. The company has not yet announced a new window for the game.)

That lineup could lead to continued profitability – with or without “GTA” in the mix.

“We think TTWO now has the ability to post $1 in annual EPS on a more sustainable basis,” says Arvind Bhatia of Sterne Agee.

Helping those earnings in the mid-term will be the expiration of Take-Two’s exclusivity license with Major League Baseball. Set to expire in 2012, the deal reportedly saddles the publisher with annual payments to MLB of $30 million to $40 million. That’s less than Electronic Arts pays the NFL for its exclusivity deal, but not by much – and the football market is four times the size of baseball.

The expiration of that deal could create the opportunity for $0.30/share of accretion in fiscal 2013, says Pachter.

Analysts agree the company seems to have finally turned the corner after a long series of difficulties and scandals. Cost cutting – including layoffs and game cancellations – has made Take Two leaner, but set the stage for success.

That said, they’re not quite ready to raise their recommendations.

“We believe the long-term outlook for Take-Two is on sounder footing and continues to be bright, though we remain guarded,” said Williams. “While issues surrounding the inconsistent track record on execution – delivering titles on time – … hampers us from embracing the stock at this time, we believe the company has turned a corner. …[It] is poised to reestablish itself as a vibrant and leading publisher in the industry.”

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