Wednesday, December 12, 2012

Take-Two Interactive (NASDAQ:TTWO): Positive Holiday Themes Emerge & GTA Visibility Improves; Upgrade to OW - Piper

Piper Jaffray upgraded Take-Two Interactive (NASDAQ:TTWO) to Overweight from Neutral with a $18 price target (prev. $12) this morning.

According to the firm three factors lead to a more positive bias:

1) Strong 2012 Holiday Trends and Quality Theme Bode Well for Big Budget Titles in 2013. Three key industry themes have emerged this holiday. 1) Holiday is tracking better than expected. Concerns around social competition and/or console fatigue have proven overly conservative. 2) The top 5 holiday games as a group are growing. Long-tail titles are, in contrast, selling exponentially worse as game quality issues are magnified by negative reviews and social media. 3) The Xbox 360 and PS3 consoles continue to be relevant in 100 million households globally. This represents the largest active console installed base in video game history.

2) Powerful Portfolio of Titles. 2011's Modern Warfare 3 (ATVI) holds the record for biggest 5-day entertainment launch grossing $775 million globally. Piper notes they are confident that GTA V can approach and possibly break this record as their visibility around the title's technical scope and launch timing have improved. Despite being Street high, Piper's June qrtr non-GAAP revenue est. of $1b appears reasonable (Street’s $821m). TTWO's portfolio outside of GTA is the strongest it has ever been. Firm notes, NBA 2K & Borderlands 2 are exceeding estimates this holiday. They are, however, cautious around the 3/26/13 launch of Bioshock Infinite given timing and quality concerns.

3) TTWO shares have outperformed the market leading up to prior GTA launches.
Assuming a Jun-13 quarter launch, we are approximately 6 months away from GTA V shipment. Although past performance is not necessarily indicative of future performance, Piper notes that in the past 3 GTA launches, TTWO shares have materially outperformed the market in the 6 months prior to shipment. Specifically, TTWO shares appreciated, on average 32% in the 6 months prior to launch in the last 3 versions, while the NASDAQ was, on average, down - 14% during the same time periods. Outperformance for TTWO vs. the market was material and consistent in each of these 3 periods (see table below) and the least amount of relative outperformance was 32 percentage points.

Raising PT to $18 Based on 12x FY13/FY14 Avg EPS. Piper notes they had previously assigned TTWO a multiple that was discounted (8x) vs. their target multiple of 12x for EA & ATVI. Based on factors discussed in this note, they believe TTWO shares deserve a multiple that is in-line with comps in the space. Firm notes better performance of top 5 titles bodes well for the sell-through prospects of GTA V. They also note an improving portfolio of titles outside of GTA are helping to "smooth" the model.

This looks like a solid call that could work over the next several months. The last similar Gaming sector call we had was this:

Gamestop (NYSE:GME): Tactical opportunity as title and hardware drought breaks; up to Buy - Goldman Sachs

Worked out just fine.

It's been a while since I've seen a positive Game publisher call. Street high target and estimates too.

Tuesday, December 04, 2012

Francesca's Holdings Corp (NASDAQ:FRAN): FRAN's Looking Good Again for the Holidays; Upgrade to Buy, PT to $38 - Konik

Jefferies & Co star retail analyst Randal Konik is upgrading Francesca's Holdings Corp (NASDAQ:FRAN) to Buy from Hold this morning with a $38 price tag (prev. $35).

Konik notes that a quarter ago he downgraded FRAN as valuation was high and he was surprised by the recent management change. However, since then valuation has become much more attractive, his confidence in the long term has not waned and he now feels comfortable with new leadership taking the baton.

Why Upgrade In Front Of The Quarter? Based on performance of the retail sector and their view that FRAN's momentum continued into 3Q, Jefferies feels good about 3Q results and think guidance was likely conservative when given on 9/4. The set up is also favorable given very negative sentiment. While it is not their intention to make a direct call on the quarter, as rather they view this as a nice entry point on a LT growth name, they do expect a solid 3Q.

Confidence In New Management. Following the September ’12 announcement of CEO/co-founder John DeMeritt’s departure, they believe the company has transitioned smoothly to the new CEO, Neill Davis. Mr. Davis is currently President and director since 2007, and clearly is very familiar with the company’s operations. Additionally, Jefferies notes they know him from his previous CFO role at Men’s Wearhouse and believe he is a capable and experienced leader. Meanwhile, they also like that Theresa Backes (COO and recently appointed President), a key member of the management team, has been a constant throughout this transition.

Solid Fundamentals. FRAN continues to have some of the strongest fundamentals in retail. The company’s unique real estate strategy and high 4-wall margins yield strong new store economics, with over 150% ROI within the first year. Operating margins are also significantly above industry average, with firm\s model forecasting ~25% operating margins this year. Also, the company's older stores continue to perform very well with SSS up 15-20% in the 1H of calendar 2012.

Valuation Is Again Compelling. FRAN currently trades at 21x EPS and 11x EBITDA, roughly in line with peer growth companies. However, Jefferies believes FRAN warrants a premium valuation given: 1) its early stage of growth vs. peers; 2) superior operating margins; 3) highly visible earnings trajectory of 25-30% annual growth; and 4) strong ROI.


And now for the most important chart:


Sentiment Now Too Negative.
FRAN’s short interest has risen sharply within recent months, from 14% before 2Q results to 28% at present. Additionally, FRAN has the third highest short interest rate within Jefferies' coverage universe of 25 companies. They believe sentiment is now overly negative at these levels especially given the strong fundamentals and growth story at FRAN.

Notablecalls: Several reasons to like this call:

- FRAN took a 8 pt (-25%) hit last quarter not because of weak results but because of the resignation of CEO/co-founder DeMeritt. Now there's a new CEO in place and has Jeffco's blessing.

- The co is scheduled to report tomorrow. Short interest has been on the raise into the quarter, rivaling only Deckers (NASDAQ:DECK). Jeffco is confident enough to make a positive call on the quarter. That's not something one sees very often. Will create buy interest.

- Konik has the hottest hand in retail right now. He called the bottom in Deckers (NASDAQ:DECK) and Abercrombie (NASDAQ:ANF).

Francesca's (NASDAQ:FRAN) could be next. Has all the characteristics.

I'm thinking +7-10% today, putting $27.50+ level in play.

Posting this around open. Scale into position if possible. Avoid overpaying at around open.