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Bear Stearns reinstated coverage of the video game business today with a new analyst and a cautious view on the outlook for the sector.

Edward Urban launched coverage with Peer Perform ratings on Electronic Arts (ERTS), Activision (NASDAQ:ATVI) and THQ (THQI) and an Underperform rating on Take Two (NASDAQ:TTWO). Urban advises investors to “trim positions” in both EA and THQ and to sell Take Two outright.

In part, Urban’s stance reflects the recent rally in video game software shares. But he also sees issues for the industry, despite the coming debut of new consoles from both Sony (NYSE:SNE) and Nintendo (OTCPK:NTDOY). “While we are sanguine on revenue growth for the industry, we are more cautious in our views of industry profitability given substantial cost increases. ,” he wrote in a research note this morning. “In the new cycle, publishers are reckoning with bigger game budgets that make a flop on a particular title more costly. Our forecasts assume that any publisher that simply maintains market share will not be able to show earnings growth cycle over cycle.”

Here are a few excerpts from Urban’s individual reports on the four companies:

  • Activision: We believe ATVI is positioned for meaningful share growth and margin expansion. However, at current levels, we believe the shares are fairly valued.
  • Electronic Arts: ERTS has benefited from strength in current-gen sales; however, we are somewhat cautious going into the holiday season. We believe shares could see a modest pullback from current levels and, on a trading basis, advise investors to trim existing positions.
  • THQ: THQ has benefited from unexpected strength YTD in current-gen and portable sales, however we are cautious going into the holiday season. We believe shares could see a modest near-term retrenchment (~10%) following their recent rally and, on a trading basis, advise investors to trim existing positions.
  • Take Two: Poor execution, lack of guidance, grand jury subpoenas, and an SEC inquiry cloud TTWO’s future… Despite positive earnings reports from ATVI, ERTS, and THQI, we believe TTWO’s upcoming results (pending options review) may disappoint. Based on the most recent NPD sales data, we estimate 4Q06 revenues were approximately $300mm, compared with the current consensus of $346mm.

This morning, shares of THQ and Take Two are fractionally lower; EA and Actvision are slightly higher.

Source: Video Game Stocks: Bear Stearns Cautious On Group