Monday, November 21, 2005

Infinium Labs CEO Resigns

A difficult month of November got even worse for Infinium Labs (OTC:IFLB) shareholders today as CEO Kevin Bachus resigned amid rumors of his involvement in a fax scam. Instead of enjoying a holiday launch of their much-anticipated Phantom video-game console, the company now appears to be the verge of bankruptcy.

Last week started with great enthusiasm. Earlier this year, CEO Kevin Bachus indicated that Infinium's Phantom®, a cutting edge online gaming service, would launch soon after Microsoft's Xbox 360 on November 21st. But on Tuesday, Infinium delayed the filing of their quarterly 10-Q. Friday followed with an 8-K filing disclosing Kevin Bachus' resignation from all duties with Infinium Labs.

It gets worse. After today's market close, dozens of previously undisclosed insider transactions of Mr. Bachus were released to the public. Many of these insider sales occurred late last year during the infamous "pump-and-dump" fax scam that ex-CEO Timothy Roberts is currently being questioned for. The SEC requires officers and directors of public companies to file a Form 4 shortly after stock sales. Yet these insider sales, whose disclosure are essential in keeping the investors informed of the insider's actions, were never disclosed until today.

Earlier this year, we discussed in length whether the Phantom was fact or fiction. The events over this last week show that Infinium Labs' journey may be over. If these recent events were no indication, then today's failure to file the 10-Q after last week's extension shows that Infinium may be headed for bankruptcy or the pink sheets.

Friday, November 11, 2005

Blame It On Katrina

"Katrina ate my earnings"

Third quarter reporting season is wrapping up with the majority of companies missing their forecasts. As the last few companies release earnings next week, only 42% have met or exceeded estimates thus far. The common excuse? Hurricane Katrina of course. Not since "El Nino" has there been a more popular scapegoat.

At last count, well over 100 companies have blamed Katrina for affecting their earnings according to Reuters Estimates. Ok, maybe I'll forgive Walmart's miss due to all the store closures... but Intel and Amazon?

There was, of course, a direct impact on many insurance, home-building and oil-related companies. But from chipmakers to Internet companies, seemingly unaffected companies are blaming their short-comings on the disaster. Many on Wall Street are showing increasing skepticism and wonder if the "Katrina get out of jail free card" is a coverup for other problems.

For instance, cosmetic firms Estée Lauder and Avon both slashed 2005 earnings forecasts in part due to Hurricane Katrina, adding that higher gas prices hurt both its representatives and customers. But both companies were struggling well before Katrina hit. Such excuses make Krispie Kreme's "Low-Carb Craze" excuse look legit.

And one of the most extreme? Folgers coffee. Last Sunday, a 77-year-old lady in Iowa found a dead baby turtle in the 2-pound package of Folgers coffee. She said a customer service representative explained that because many Folgers plants are based in New Orleans, the turtle might have ended up in the coffee as a result of Hurricane Katrina. A spokesman for Procter & Gamble (the company that owns the Folgers brand) said it's too early to say how the turtle ended up in the coffee.

Although the previous example obviously did not affect earnings (Proctor & Gamble actually exceeded estimates), it shows the broad impact of Hurricane Katrina.

Some companies may mistake the hurricane with the real factor that's squeezing the economy: the campaign by the Federal Reserve to raise short-term interest rates. It will be interesting to see if these companies' misfortunes are indeed attributable to weather or perhaps better attributable to the Fed and slowing economic growth.

Tuesday, November 01, 2005

Strong Buy of the Month - TTWO

Take-Two Interactive (TTWO)
Current Price = $17
12 mo Target = $25

Back in July, we discussed the future of the Grand Theft Auto franchise after Take-Two’s blockbuster game was tagged with the “Adults-Only” rating. Since then, the company has been rushing to finish the revised version. On Oct 18, it released Grand Theft Auto: San Andreas Special Edition (rated M for "Mature") for Sony's PlayStation 2 -- with a couple of extras. Not those kind of extra, though.

Shares of Take-Two Interactive are now attractively priced heading into the coming cycle of next-generation consoles.

Recent Blunders
Earlier this week, Take-Two (NSDQ:TTWO) reduced its earnings expectations for the 3rd time in only 4 months. Take-Two said it had to decrease its guidance for this year and next because of issues including product delays. The company now says that it expects earnings for fiscal 2005 of between $0.53 and $0.56 per share, and sales between $1.18 billion and $1.19 billion.

The company blamed a delay in shipments of Grand Theft Auto: Liberty City Stories for Sony's PlayStation Portable device in some European territories. The game won't hit the shelves in those areas until the first quarter of fiscal 2006, rather than the fourth quarter of FY 2005.

Meanwhile, citing "expectations of a continued cautious U.S. retail environment through the holiday season, and the inherent uncertainty in forecasting the pace of manufacturer shipments and consumer adoption of new hardware platforms," Take-Two dragged down its guidance for FY 2006.

Not surprisingly, 3 analysts downgraded shares of Take-Two on Tuesday. The stock now hovers just above its 52-week low of $16.92.

Oversold and Undervalued
We believe the market has overreacted to these recent blunders. Shares of Take-Two Interactive are now attractively priced heading into the next cycle of next-generation consoles. Microsoft’s Xbox 360 is slated for a Nov 22nd release, followed by new consoles from Sony & Nintendo in 2006. Although there could be a longer term negative impact on the Grand Theft Auto franchise, we believe the recent selloff was overblown. In fact, the publicity could further strengthen the cult status of the Grand Theft Auto franchise. Plus Take-Two is no one-hit wonder. We believe other key releases will drive results such as Manhunt, Max Payne 2: The Fall of Max Payne, Mafia, and Red Dead Revolver.

Investors forget that Take-Two is still a relatively small, growing gaming company. But with a current PE ratio of only 15, the stock is priced as a mature company, not one that analysts expect to grow 25% annually for the next 5 years! Take-Two is cheap and poised for a near-term correction to fall more inline with its competitor's valuations:

TTWO vs Industry
Price/Earnings 15.6 vs 42.4
Price/Book 1.9 vs 6.0
Price/Cash Flow 14.4 vs 25.5
Price/Sales 1.0 vs 5.7

After all the supposed bad news this year, TTWO is still poised to earn over $1 per share in 2006 – a 100% year-over-year improvement. Plus it continues to churn out $60 million in Free Cash Flow. The balance sheet is solid with nearly $2.80 per share in cash/investments and no debt. This is a rare chance to invest in a small-cap, high-growth Gaming company that is poised for a valuation correction before the next cycle of consoles hit the market.