Taking Issue With Take Two Interactive

| About: Take-Two Interactive (TTWO)

After reading an article from StreetAuthority about companies with the fastest growing earnings, it got me looking into the companies not already owned in Stone Fox Capital's Opportunistic models. The companies expecting huge earnings growth next year appear to be overlooked, but one should use the list as a starting point for research. The report is only as good as the underlying data. Not to mention that analyst estimates typically aren't up to date so reports can easily give false positives.

StreetAuthority makes a good point that these stocks expect to more than double earnings, yet they all trade for a PE of less than 13. Based on that combination, all of the stocks appear cheap. Now the question is whether the growth will continue on into calendar year 2013-- or if it's just a one year fluke. Another telling sign will be the direction of estimate changes for next year. It's typical for analysts to not update estimates leaving a wide variation, so if the numbers are dropping then watch out.

Interestingly, our models already own Manitowoc (NYSE:MTW), Terex Corp (NYSE:TEX), United States Steel (NYSE:X), and MF Global Holdings (MF,) plus we had already identified a few other stocks as potential purchases in the future.

Since Take-Two Interactive (NASDAQ:TTWO) tops the list with 463% expected earnings growth and Electronics Arts (ERTS) announced a buyout of PopCap Games on Tuesday after market, it seemed prudent to first check out Take-Two Interactive's potential. With a forward PE of sub 7, TTWO clearly has an attractive valuation-- especially considering ERTS just paid up to $1.3B for a company that only had $100M in revenue for 2010. TTWO should top $1.1B in revenue with a market cap of only $1.3B. ERTS clearly sees a brighter future for PopCap than TTWO, whether from massive revenue growth or in the social media gaming sector.

TTWO still languishes in the packaged software gaming industry along with ERTS and Activision (NASDAQ:ATVI). All three companies were hot properties back in the 2000s, when the gaming industry exploded with multiple console additions such as the Playstation 3, XBox, and Wii-- not to mention faster PCs.

Lately though, the industry has struggled as sales have stagnated while online games have soared. Unfortunately all three traditional gamers completely missed the trend as Zynga, Playfish (bought by ERTS), PopCap Games (brought by ERTS), Rovi and others dominate social media and mobile games.

While these mobile and social media games appear to not hold any technological superiority that builds a moat around competitors, so far the traditional gamers have been unable to tap into the markets. Really, how hard is it to create Farmville? Angry Birds is a simplistic game, but it caught on with kids big time. Ease of use or the ability to link in with friends was ultimately the key. Clearly it takes more of a marketing hook than a engineering genius to be successful in this category. Maybe TTWO just doesn't have that skill set.

TTWO still appears only focused on the traditional packaged games. Until Grand Theft Auto becomes available to play and interact on Facebook, I sure don't see the company being able to garner significant revenue from the new outlets. Earnings will remain choppy and too dependent on console cycles for investors to latch onto that massive growth for next fiscal year. TTWO remains cheap but it doesn't have the catalyst for any significant gains.


Disclosure: I am long MTW, TEX, MF, X.

Additional disclosure: The information and data is believed to be accurate, but no guarantees or representations are made. The information contained herein is for informational purposes only and should not be relied upon as advice.