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Could Icahn have a winner with Take-Two Interactive?

Nearly a week has passed since the presidential election, and hopefully, by now, some of the emotional disappointment has worn off.

Based on the popular vote, the election was pretty close, and what that tells me is half the country is happy, the other half is not. While I, like many, had my opinion on who would be best to turn around the economy, that no longer matters. I, and all others, have to look at what to do now and going forward for the next four years. I’m confident the country will not fold or collapse, although many times it feels that way because our mainstream media has become so good at stirring up emotions.

Over the last 75 years, the average stock market return is around 10 percent. If you look at the current scenario with a Democratic president, the stock market return climbs to 15.4 percent.

Maybe our forefathers had a good plan and knew what they were doing.

I’ve followed billionaire investor Carl Icahn for years. Sometimes I agree with him, sometimes I wonder what in the world he is thinking. Just like other investors, he has his wins and losses, but when he loses, it’s pretty big. However, so are his wins. Icahn has increased his stake in video game maker Take-Two Interactive Software (Nasdaq: TTWO) to 10.6 percent from 9.5 percent, and this is the second time he has stepped in to acquire shares.

My 30 years of experience tell me he sees something and has some plans for this company to increase its value, so I decided to take a look and see if I agree with Icahn this time.

Founded in 1993, Take-Two is based in New York City and has 2,235 full-time employees. Over the last year, the company has seen a 52-week high of $16.99 and a low of $7.37. The stock currently trades around $11 per share and has a market cap of $1 billion.

The company is a purveyor of many video games and best known for the game "Grand Theft Auto." With losses over the last 12 months, the company has no PE compared to an industry PE of 18.4. Price to sales looks good for the company at 1.1, one-third the industry average of 3.7. Price to book value for the industry is 8.5 compared to the company at 5.6.

Take-Two does carry about $308 million in goodwill and intangible assets, which is $175 million below the equity. While that makes me a little nervous, I also understand this is a software company, not a manufacturer, so the asset makeup will be a little different and the price to tangible book is better than the industry.

Sales for the company declined year over year at a rate of 8 percent, while the industry experienced a 4 percent increase. Earnings per share year over year fell by 312 percent when the industry declined 15.9 percent. Looking at the income statement over the last two years, I noticed that in comparing the most recent 12 months to the previous 12 months, there was a drop in revenue in the fiscal first quarter of this year and the fiscal fourth quarter of last year, yet cost of revenue and selling, general and administrative expenses stayed roughly the same.

The balance sheet looks OK with a current ratio of 2.4, slightly above the industry at 2.3. Debt to equity is higher for the company at 67.2 when compared to the industry average at 20.4. Remember that the industry is carrying roughly 50 percent more in intangible assets, which could be written off, causing the debt-to-equity to increase.

Return on equity for Take-Two is a negative 33.5 percent compared to the industry of 20.4 percent. Net profit margin is also negative for the company at 19.8 percent while the industry has a positive net profit margin of 20 percent. These were affected by the causes I outlined in the previous paragraph.

Take-Two has done a good job of managing their account receivables, turning over 10.1 times over the last 12 months, well above the industry average of 6.3. The inventory turnover over the last 12 months was 11.1 times for the company, not quite as good as the industry turnover of 13.1.

The big change came when I looked at the analyst estimates. For fiscal year ending March 2013, the mean analyst estimate is 29 cents. However, looking at March of 2014, it is up nearly 10-fold to $2.25.

You must be wondering, "What is going on?"

The huge success of "Grand Theft Auto" was delayed and will come out next year, hence the bad past 12 months and the huge jump in EPS estimate. With the stock trading around $11 per share, the forward PE is only 4.9. The range of estimates for the 18 analysts go from a low of $1.03 to a high of $3.18, and if the company has a 50 percent miss on the March 2014 earnings per share, the stock would still be trading at a PE of around 10, still very good.

So Icahn, I like your thinking here. I’ll be watching, maybe even participating in the near future.

Have a question or a company you'd like me to take a look at? Email me at brent@wilseyassetmanagement.com.

Wilsey is president of Wilsey Asset Management and can be heard every Saturday at 8 a.m. on KFMB AM760. Information is provided by Reuters.

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