MKM Analyst Likes Activision, Take-Two & EA After E3

In a report published Monday, MKM Partners’ Managing Director Eric Handler provides a few takeaways from the E3 (Electronic Entertainment Expo), from which he left feeling incrementally optimistic regarding video games publishers.

In parallel with the “continued maturation of the new content cycle, the number of franchise titles planned for release are beginning to accelerate as is the perceived quality of those games,” he noted.

Related Link: E3 2015: What Investors Should Know

Moreover, operating margins continue to widen, aided by the “market share gains of full game downloads and ongoing contributions from add-on content (i.e., microtransactions, DLC).”

The analysts at MKM remain favorable toward Activision Blizzard, Inc. (NASDAQ: ATVI) (Buy rating, $27 price target) and Take-Two Interactive Software, Inc. (NASDAQ: TTWO) (Buy rating, $40 price target) and are becoming incrementally positive regarding Electronic Arts Inc. (NASDAQ: EA) (still Neutral rated, $67 fair value).

Activision

The firm continues to think that both the management's EPS guidance of $1.20 and the analysts’ $1.25 estimate could prove conservative, as they see a variety of potential upside sources. Namely, modest financial expectations for several games including "Call of Duty: Black Ops III," "Destiny," "Heroes of the Storm" and "Guitar Hero," could drive plenty of upside to estimates.

Take-Two

MKM Partners sees Take-Two as an “attractive special situation investment given its sizable cash balance of nearly $10 per share.” Moreover, the firm thinks investors are underappreciating the advances made in gross margin (up from 33 percent in FY09 to 48 percent in FY15), as well as the operating margin (“trough margin now runs around 11% versus prior negative levels while peak margin has doubled to 22%”).

Even further, the analysts highlight the positive comments for the multi-player "Battleborn" demo. They assure that the risk/reward profile for the game seems favorable as expectations incorporated in their model are quite modest.

Electronic Arts

Finally, the experts look into Electronic Arts, which has been in the spotlight of many firms lately. There seems to be a widespread opinion in Wall Street that the management's EPS guidance of $2.75 and consensus of roughly $2.85 will likely prove conservative as many of the upcoming releases -- especially that of "Star Wars Battlefront" -- are likely to drive upside.

Related Link: Brean And Wedbush Both Think EA's Guidance Is Conservative: Here's Why

“While we continue to have concerns about EA's premium valuation, it is difficult to deny management's success in exceeding forecasts over the last two years and its ability to increase its digital revenue, expand gross margin and keep operating expenses flat,” the analysts concluded.