Pachter: 'Flawless' Take-Two Turnaround Chance Under 50%

In his latest note to investors on Take-Two's recent "messy" results, Wedbush Morgan's Michael Pachter comments on the publisher's "uphill battle" and said that the likelihood of new management perfectly executing its return to profitability is under 50 percent. Pachter notes that the publisher's "messy" results, which saw sales above consensus but larger losses for the sixth consecutive quarter were somewhat expected with the recent turnover in its board of directors. "New management has been on the job for barely 75 days," said Pachter, "and we did not expect immediate results." In commenting on the company's plans for restructuring, which are to include reorganizing of its its international operations, general and administrative functions, and PC distribution, as well as possibly divesting itself its distribution and accessories business, Pachter said, "We applaud management’s efforts, and expect these and other initiatives to ultimately bear fruit." However, Pachter warns that "we think that these savings will be insufficient to offset the large operating losses incurred from the company’s business as currently configured," noting that the expected savings of $25 million will "only make a dent" in expected three-quarter losses of $128 million. "Without better decisions about games," he says "we are not optimistic that Take-Two can generate the earnings power necessary to justify its current share price." Furthermore, Pachter notes that the company's challenge in return to profitability is hindered by "heightened competition," and that Wedbush is "not sanguine about their prospects in a competitive sports market." Market share gains, he says, can only come at the expense of losses for EA, which, if provoked, could attempt to "bury Take-Two’s sports effort" with an attack on price, marketing, and improvements in quality on its basketball and hockey games. "We continue to agree that there is great potential for profitability at Take-Two," he concludes, "and think that if new management executes flawlessly, a return to profitability is likely. However, we continue to believe that the return to sustainable profitability will take at least until FY:09, given that a great deal of this profit potential has been eroded by poor game decisions and excessive operating costs." "We expect that it will take more than a year for new management’s initiatives to limit poor game decisions and lower operating costs to generate results, and think that the likelihood of perfect execution is below 50%," said Pachter. "If perfectly executed, we think that the company’s strategy could result in earnings of as much as $1.00 per share on a sustainable basis. However, we believe that the likelihood of failure is greater than 50%, and that if a failed strategy is adopted, the company may struggle to deliver sustainable profitability at all."