Reviewing Our 2013 Picks: MPEL, MSG, TTWO, YHOO, FL

5th Street Research

5th Street Research’s Buy Recommendations Easily Outperform The Market

Having been away from the market with other obligations for the past month or so, I thought it would be interesting to review our 2013 picks before making any new recommendations in 2014. Since launching in late September, we have published buy recommendations on 5 different companies: Melco Crown Entertainment (MPEL), Madison Square Garden (MSG), Take Two Interactive (TTWO), Yahoo (YHOO), and Foot Locker (FL). While the S&P 500 and Nasdaq finished out the year strong, our picks have easily outperformed the broad markets, returning an average of 16.5% vs. 7.5% for the S&P 500. A brief update on each of our recommendations below…

Melco Crown Entertainment (MPEL): City of Dreams Manila and Studio City Macau

Buy Recommendation
Published 9/27/2013: The Best Bet in Macau is Melco Crown Entertainment (MPEL)
Price Then: $31.60
Price Now: $42.99
% Change: +36%


Macau as a whole has been the recipient of quite a bit of attention around here since launching, and for good reason… Macau has been the world’s fastest growing economy over the past decade with average annual GDP growth near 15%. It generates more than 7x  the revenue of Las Vegas and is the gambling epicenter of the world. Melco Crown’s City of Dreams is one of the most impressive properties in Macau and dominates the ultra important “Premium-Mass” market in the region. MPEL’s revenues and profits stand to explode over the next two years as they open two new massive properties, Studio City Macau and City of Dreams Manila. Studio City boasts the best location on the Cotai Strip, Macau’s version of Las Vegas Blvd., and is poised to be one of the biggest beneficiaries of the continued growth of the Macau. Despite the 36% gain since our initial recommendation of their shares, I continue to view MPEL as a strong buy for the foreseeable future.

Madison Square Garden (MSG): Hidden Assets and Rising Sports Franchise Valuations

Buy Recommendation
Published 10/11/2013: Significant Value in Madison Square Garden (MSG)
Price Then: $57.54
Price Now: $56.72
% Change: -1.4%


Madison Square Garden has been the laggard of our model portfolio thus far, currently down 1% since our original recommendation. The New York Knicks have gotten their season off to a terrible start this year, however there has been little to no other news or events out of MSG in the past 3 months. With the Madison Square Garden renovation project finally complete, cash flows and earnings will start becoming normalized for the first time since their IPO. The real story here though remains the hidden value of the company’s array of assets. As the owner of the Knicks and Rangers, MSG Networks, Madison Square Garden Arena and its associated air rights, and numerous other venues/ assets; MSG remains greatly undervalued when using a sum of the parts analysis. This one may require some patience, but I continue to view MSG as a strong buy.

Take Two Interactive (TTWO): Massive Cash Hoard, Best IP Portfolio in the Industry

Buy Recommendation
Published 10/15/13: GTA V Makes Take Two Interactive (TTWO) a Steal
Price Then: $16.94
Price Now: $17.80
% Change: +5%


Although shares of Take Two have appreciated since our recommendation, they have lagged the market, which is somewhat perplexing after Grand Theft Auto V shattered analyst estimates and became the highest grossing entertainment release ever. While analysts anticipated TTWO would sell 18 million units of GTA V during their most recent quarter (a number I reported would prove to be very low), 25 million copies were actually sold. TTWO stock failed to jump on this news though, they actually traded down sharply the next few sessions as management failed to give much clarity regarding their future pipeline/ next blockbuster release. TTWO’s haul from GTA V should leave the company with more than $1B worth of cash on their balance sheet. With a market cap of only $1.6B, this cash hoard is substantial. Take Two also owns arguably the most valuable intellectual property portfolio in the industry with proven franchises such as GTA, BioShock, Red Dead Revolver, Max Payne, and NBA 2k. Despite management remaining mum on the next big release for now, they have an amazing track record when it comes to making hits. Everything considered, I see fair value for Take Two stock between $22-$24, at least 25% upside from today’s closing price. I maintain a buy rating on shares of TTWO.

Yahoo (YHOO): Alibaba Stake Continues to Create Value, Meyer on Acquisition Spree

Buy Recommendation
Published 10/15/2013: Amended Alibaba Agreement Makes Yahoo (YHOO) More Attractive
Price Then: $33.38
Price Now: $41.03
% Change: +22.9%


As Alibaba continues their rapid growth, Yahoo continues to reap the rewards. Despite a core business that is still struggling to gain momentum, Yahoo had a great 2013 with shares more than doubling during the year. New CEO Marissa Mayer has been on quite the shopping spree since taking the helm, with Yahoo acquiring 28 companies in 2013, including a $1B purchase of Tumblr. Mayer has made it clear that she intends to ensure Yahoo remains the world’s homepage while also placing a large emphasis on mobile and content creation. In a demonstration of their commitment to content, Yahoo recently hired Katie Couric as a ‘global anchor’ and released a new News Digest App. It is yet to be seen how any of this efforts will pan out, but if nothing else, Mayer has been ambitious. YHOO should still see some upside from Alibaba as it nears its inevitable IPO and could get a lift from the news when announced, but shares aren’t as much of a bargain as they were 3 months ago. If you already own YHOO stock I wouldn’t be in any rush to sell it, but I wouldn’t be in any rush to go out and buy more either. I view shares as undervalued still with 10-15% upside, but would need to see core operations start to show signs of improvement before considering YHOO a strong buy at current levels.

Foot Locker (FL): Buy into Nike, Adidas, and Under Armour’s Growth at a Discount

Buy Recommendation
Published 10/26/2013: Try Foot Locker (FL) on for Size
Price Then: $34.20
Price Now: $41.11
% Change: +20.2%


Last but certainly not least of our recommendations during 2013 was Foot Locker. The athletic apparel industry has been one of the strongest performers of the past 25 years. Nike is one of the all time great growth stocks and shows no sign of slowing momentum. Adidas and Under Armour fit the same mold. Justifiably so, all three of these companies trade at lofty valuations. Foot Locker is the largest retailer of athletic shoes in the US, dominating the market with the portfolio of brands including FootAction, Eastbay, Champs, and of course their namesake stores. Management has proven to be shareholder friendly, approving a $600 million buyback and an 11% dividend hike last year. While many retailers reported lackluster earnings in their most recent quarter, Foot Locker easily exceeded both earnings and revenue estimates. Despite all of this, shares still trade at a significant discount to retailers such as Finish Line and Dick’s Sporting Goods. The athletic apparel industry has shown no signs of slowing, and Foot Locker is as well positioned to benefit from this trend as anyone. As long as they continue to trade at such cheap valuations relative to their peers, I will continue to maintain a buy rating on shares of FL.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.

Take Two (TTWO) Buys Back 12 Million Shares of Their Stock From Carl Icahn


Carl Icahn Sells His Entire Take Two (TTWO) Stake Back to the Company

Take Two Interactive (TTWO) announced this morning that they would be repurchasing 12 million shares of their stock from the Icahn Group for $203.5 million. The move ends Icahn’s relationship with the company after an 81% return on his investment in TTWO. Three directors whom were placed on the board by the Icahn Group announced that they would be stepping down as per the buyback agreement. The 12 million shares bought back represent nearly 14% of the outstanding shares of Take Two stock as of yesterday’s close. Shares are down 4% currently today, however I view this news as being quite bullish and believe it shows that management also feels TTWO shares are being significantly undervalued at present levels. The repurchase was done outside of their existing buyback plan announced in February of this year that authorizes the company to repurchase an additional 7.5 million shares of stock. I currently view TTWO as a strong buy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.

Has Take Two’s (TTWO) Stock Found a Bottom?


Take Two (TTWO) Looks to End Downtrend After Developing A Double Bottom

Despite blowing away analyst estimates during their most recent quarter, Take Two Interactive (TTWO) stock is down 5% since reporting, flat from where I recommended purchasing shares in anticipation of stronger than expected Grand Theft Auto V sales. I still view TTWO as a strong long-term buy, and believe their downside is very limited from their current levels given their massive cash position and extremely valuable intellectual property portfolio. Both Microsoft’s (MSFT) Xbox One and Sony’s (SNE) PlayStation 4 sold over 1 million units on their release day, positive signs for the industry as a whole heading into the holiday season.

Looking at their chart we can see that Take Two has traded down sharply on the open the past two sessions, but bounced strongly off of the $16.35 level and recouped their initial losses each day, forming a very defined double bottom pattern. Shares could run into some resistance at $17, but a move above that level would confirm their short-term reversal and set the stage for a move higher. Take Two shares are currently at a very attractive entry point and I believe $16.35 will prove to be the floor for TTWO’s stock price moving forward.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.

Take Two Interactive (TTWO) Crushes Q2 Estimates

Take Two Interactive (TTWO): Reports Record Quarter Fueled By Grand Theft Auto V, Raises Guidance For Fiscal 2014

As reported two weeks ago,  wall street analysts were greatly underestimating sales of Take Two Interactive’s (TTWO) Grand Theft Auto V, leading to a blow out second quarter. Despite easily accessible sales figures for GTA V, most analysts failed to adjust their models, and kept earnings predictions for the quarter at levels that would reflect 18-19 million copies sold. Take Two announced that to date, 29 million copies have been shipped less than 40 days since its release, already exceeding the 25 million the street was anticipating during its first 12 months on shelves. This led to TTWO reporting earnings of $2.49 per share on $1.27 billion in revenue, versus consensus estimates of $1.70 per share in earnings and $947 million in sales. Take Two also significantly increased their fiscal year 2014 outlook. The company now expects full year revenue of $2.2- 2.3 billion generating earnings per share between $3.50- $3.75, up from their previous view of $2.25- $2.50 EPS on revenue of $1.78- $1.88 billion.

While management failed to highlight their next major release, they did sound upbeat about their future and their ability to continue producing huge hits…

Take-Two has an extensive development pipeline of groundbreaking new intellectual properties and exciting titles from our proven franchises, along with digitally-delivered offerings to complement our core business. We currently have more than ten unique titles planned for next-generation consoles, including multiple releases slated for fiscal 2015. As a result, I am confident that we will be able to achieve Non-GAAP profitability in fiscal 2015 and every year for the foreseeable future.

Since the quarter’s end, Take Two has released their annual installments of the NBA 2k and WWE 2k series, with NBA 2k14 moving over a million units in its first 12 days. Given the consistent track record of these franchises and the launch of Grand Theft Auto Online this month, revenues throughout the holiday season will remain strong. With a huge cash position and arguably the most valuable portfolio of intellectual property in the industry, shares of Take Two have little downside from current levels and significant room to appreciate. I continue to view TTWO as a strong buy and one of our top picks.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.

GTA V Makes Take Two Interactive (TTWO) A Steal

Take Two Interactive (TTWO): Banking on the success of Grand Theft Auto V

The success of Take Two Interactive’s (TTWO) Grand Theft Auto V, has been well documented and is certainly not taking anyone by surprise at this point. What is a surprise is that just weeks after GTA V shattered just about every record pertaining to an entertainment product release, TTWO appears to be trading at a discount with shares down 12.5% in the past month and a half. With sales of their latest blockbuster easily outpacing analyst expectations, GTA Online not being included in most estimates and the successful launch of NBA 2K14 this month, I expect TTWO’s numbers to come in significantly better than what the street is currently anticipating when their Q2 release comes out on the 29th.

Doug Kreutz of Cowen & Company recently upped his price target on TTWO and called for first-year sales of 25 million copies of Grand Theft Auto V after it was reported that the $1 billion sales mark had been crossed in just three days. In a not released to investors earlier in the year, Sterne Agee’s Arvind Bhatia outlined a hypothetical profitability model for GTA V based on an estimated development cost of $137.5 million for the game and a marketing spend in the range of $69- $109.3 million. Bhatia estimated that if GTA V sold only 15 million copies it would translate to operating profit of $193.6 million for the game and would contribute $2.11 to earnings per share. He went on to estimate that should GTA V sell 25 million copies in its first year, operating profit for the game would be $390.8 million or an earnings per share contribution of $4.26. It is worth noting that GTA Online and its contribution to GTA V’s profitability has not been accounted for in Bhatia’s analysis, a number that I believe will be significant with $200 million in revenue expected to be generating in its first year through microtransactions and a free-to-play model.

25 Million Copies Sold In One Month?

Fortunately for us, it is very easy to get a good idea of just how many copies have sold thus far without waiting for Take Two to put out a press release announcing they’ve reached another sales milestone . publishes weekly sales analysis covering the entire console gaming market, with their most recent report released yesterday covering sales up to the week ended October 5th. From 9/29- 10/5 1,080,086 copies were sold for PS3 and 951,537 copies on XBox, a total of 2,031,623 units moved for the week. That brings total copies sold as of October 5th, less than 3 full weeks from its release date, up to 22,629,833. Considering 2 million copies were sold in the most recently reported week, and 3 million in the week prior, we expect sales will continue to gradually decline but will remain meaningful. Sales will see a boost this week however as the game was just released in Japan and Brazil on October 10th. It would be reasonable to expect that another 1.5-2 million units have been sold in US/ Europe in the 10 days since the last sales report and 500,000 in Japan/ Brazil, putting Grand Theft Auto 5 at 25 million copies sold in its first month, a number analysts were looking for over the course of its first year on the shelves.

For an idea of how these sales figures will translate to Take Two’s revenue/ earnings numbers, a breakdown for a typical $60 game selling at retail looks like…

  • $60 Retail Price
  • -$20 Retailer Margin
  • -$7 Platform Royalty
  • -$4 Distribution/ Packaging
  • Leaving $25-$26 to the publisher depending on how many returns on sell-in versus sell-through

25 million copies sold would translate to $625- $650 million in revenue for TTWO from Grand Theft Auto V. Its been reported that between production and marketing costs Take Two spent $265 million on GTA V, yielding a profit of $360- $385 million. Even if we assume GTA V has already sold 70% of the total copies it will sell for the year in its first month, a high number to assume with the holiday season upcoming and a PC version reportedly expected in Q1 2014 (not to mention the potential for a release on PS4 and Xbox One to add to sales), 10.7 million more copies sold would account for the remaining 30% over the course of GTA V’s first year. That would bring the total profit contribution from Grand Theft Auto V in its first year to $628-$662 million. To put that number in perspective consider TTWO has an enterprise value of only $1.4 billion. Some analysts have also stated they expect $200 million in digital sales in the first year from the multiplayer component of their blockbuster, GTA Online. The margins on this revenue should be quite high as they are merely selling in-game cash that players can use to purchase cars, weapons, and other items to use while playing online. This number is expected to reach at least $500 million over the lifetime of the game.

Take Two Is More Than Just Grand Theft Auto

The most common criticism of Take Two Interactive and what appears to be the current market sentiment, is that they are too reliant on the Grand Theft Auto franchise. It is true that TTWO is reliant upon producing blockbuster games with installments coming only once every few years, while Electronic Arts (EA) and Activision (ATVI) have annual releases of their key franchises. Yet they don’t shy away from this fact, they believe in building blockbuster franchises, taking their time to ensure the end product is up to their standards, and building out brands/ intellectual property that has long-term value. Just this month they released their annual installment of NBA 2K14 which has been met by stellar reviews. Last year’s edition sold over 5 million units and the franchise is their most reliable annual revenue source. They also picked up the rights to the WWE franchise from THQ, THQ’s version last year sold 2 million copies. BioShock Inifinite, released early this year and selling over 4 million copies thus far, is the third installment in a franchise that has also proven to have staying power and be a consistent seller. Throw in the Borderlands and Max Payne franchises and Red Dead Redemption (13 million copies sold), and it is clear Take Two has built a valuable portfolio of brands that have amassed loyal fans, making this company more than just a Grand Theft Auto story regardless of the outsized returns that is generated from that one source.

It is an exciting time for the video game industry right now. Grand Theft Auto V has shattered nearly every record there is in the industry within a month of being released, the next Call of Duty franchise is coming in a few weeks, and both the Playstation 4 and Xbox One are slated to be released in November. While the dynamics of the industry have certainly changed over the past few years, we have seen the potential of digital distribution, downloadable add-ons, and free to play models with in-game currencies. With an installed base of players sure to exceed 30 million players for Grand Theft Auto V alone, Take Two is positioning themselves to take advantage of the shift to digital distribution and monetization of social worlds in games. Within 3-5 years all distribution in the industry could be digital, while certainly an alarming thought for GameSpot (GME), it could be a windfall for publisher’s and their margins as well as boost revenues through the added ease of purchase created for consumers.

TTWO Is a Buy at Current Levels

I expect Take Two to blow out estimates when they report results on October 29th on the back of Grand Theft Auto sales for the first month meeting their expectations for the year. The consensus estimate is looking for earnings of $1.55 per share for the quarter. With 22.6 million copies sold by October 5th, it seems reasonable to assume 21 million copies were sold in the first two weeks of the games release which were the last two weeks of TTWO’s Q2. This total easily surpasses the consensus estimates, I expect earnings in the range of $2.30-$2.40 per share for Q2 and a rosy outlook for the rest of the year on the continued strength of Grand Theft Auto V through the holiday season and the releases of NBA 2K14 and WWE 2K13. The lack of any future visibility regarding Take Two’s pipeline of games is contributing to their current undervaluation in my opinion, but expect management to offer some sort of plan for the future leveraging the strength of their portfolio of brands and proven franchises. With the windfall of cash that will be added to the company’s coffers through GTA V sales, a share buyback or other means of returning capital to shareholders becomes a distinct possibility. After bidding shares up for months leading up to GTA’s release, investors have taken a pessimistic view of TTWO despite sales of their hit game easily outpacing the street’s already lofty expectations. Look for the Q2 conference call in two weeks to shore up concerns about the pipeline and present numbers far exceeding expectations, with Grand Theft Auto V poised to contribute over $600 million in earnings in its first year. The future is bright for Take Two and the industry as a whole with the next console cycle about to begin, and innovations in digital distribution and online gaming continuously offering new opportunities. I believe fair value for TTWO equity is $24-$26 per share.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.

Go to top