Time for a Take-Two Take-off?

Video game company Take-Two Interactive is in a dicey situation. To put the problems in terms fans of its signature game might understand: The mule gotta unload the dynamite fast cuz the sharks and zombies startin' to get twitchy.

And by that, of course, we mean the hard core fans (zombies) of Take-Two's money machine, Grand Theft Auto (the dynamite), aren't happy because the fourth version of the game hasn't yet been released and, as a result, missed the 2007 holiday shopping season.

Meanwhile, the company has had to tap lenders (sharks) for more credit. The mule is Take Two's Rockstar Games division, which produces Grand Theft Auto, and which wants it perfected before delivery.

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Sounds scary, but the company could be a takeover candidate, and its December 18 quarterly report announcement had some tantalizing bits that make Take-Two shares (symbol TTWO) worth a look.

Analysts are deeply split on Take-Two's prospects. This makes the stock a high-risk, high-reward situation, much like the action in Grand Theft Auto.

In the game, players inhabit an urban landscape populated by drug dealers, hookers, hit men and mob bosses, and gain points by hijacking cars and taking over criminal enterprises. Everyone from grandmas and police organizations to sex workers have protested the game.

Take-Two also offers more benign titles, such as Dora the Explorer and such sports games as College Hoops.

In the past, Take-Two's management looked like a criminal enterprise, having been found to have backdated stock options and booked sales improperly. Shareholders replaced the chief executive and the board of directors in March 2007.

So what's in Take-Two's favor? You first have to appreciate the booming video-game market. NPD Group, a data-research company, reports that video-game software sales in November were up 62% from the same month in 2006.

Plus, the number of game software companies is small and shrinking. One player will go by the wayside when the industry's second largest player, Activision, consummates its merger with the game division of Vivendi (VIV), to form a new company called Activision Blizzard. Vivendi Games includes World of Warcraft, the world's top online role-playing game.

That makes Take-Two, warts and all, a target. Kaufman Bros. analyst Todd Mitchell notes that Take-Two's management has said both that the company is not for sale and that further consolidation is inevitable. "We cannot help but think Take-Two is looking at all options," says Mitchell.

Take-Two shares closed December 18 at $18.06, up 1.1% for the day. The stock is up considerably from $14.18 -- the price it touched on November 20 before the Activision-Vivendi deal was announced -- but well below the 52-week high of $24.80, hit last March.

There's also a nowhere-to-go-but up reasoning. Mitchell and a couple of other analysts argue that, given how low Take-Two's stock is trading relative to other video-game companies, the stock could jump if Take-Two could clean up its act.

Says Pacific Crest analyst Evan Wilson: If the company could deal with a few problems, "such as lack of consistency, regulatory issues and lack of profitability in its sports business ... TTWO could double."

The stock trades at 12 times the $1.39 per share that Mitchell expects Take-Two to earn in calendar 2008 (analysts, on average, expect the company to earn 93 cents a share in the fiscal year that ends in October 2008). The average video-game stock trades at 27 times estimated earnings.

Take-Two released its numbers for its fiscal fourth quarter, which ended October 31, on December 18, and the news was pretty good. It lost 10 cents a share, far better than analysts' average forecasts of a 23-cent-per share loss. Revenues of $293 million were in line with analysts' estimates. The company said it expects sales of $1.1 billion to $1.4 billion for the fiscal year that ends next October and earnings per share of 85 cents to $1.43 per share.

True, the company could get whacked if Grand Theft Auto IV doesn't deliver an overdose of graphic gangster violence this spring. But the downside seems baked into the stock already.

And the upside, well ... To paraphrase Al Pacino's Tony Montana from the movie Scarface: In this country, you gotta make the money first. Then when you get the money, you get the power. Then when you get the power, you get the big price-earnings ratio.