Let The Games Begin! Electronic Arts- Its In The Details

By Yaser Anwar, CSC of Equity Investment Ideas

Those who are familiar with EA’s games know that the headline ‘Let The Games Begin‘ & ‘Its In The Game‘ comes right before their games load up (just thought you should know).

Since ERTS reported on Nov. 3 the stock gapped up 10%. That makes ERTS up 36% since the end of June. A little consolidation would be healthy, but the overall picture remains positive.

Are they trading at a premium? Yes. Do they deserve it? Yes.

1) EA officials said they are ready for the new console launches, with eight new titles set to be released in the quarter and more than 30 games in development for all the next-gen systems. EA is pushing aggressively in the next-gen market which is positive.

2) For the key holiday quarter, EA projected revenue to be $1.2 billion to $1.3 billion. Analysts surveyed by Thomson Financial were expecting sales of $1.2 billion.

3) ERTS has a strong balance sheet, with approximately $2.4 billion in cash and short-term investments and over $7 per share.

4) Industry leading margins- For the last 10 years, ERTS has grown its annual sales at a 19% CAGR while gross margins have advanced from 51.1% to 60.0%, higher than all its competitors.

5) ERTS has expensed stock options and increased product development spending in preparation for the next gen consoles; this expense has hit ERTS more quickly than its peers as it expenses, rather than capitalizes, the majority of its development costs. However, investors should expect to see operating margins of approximately 9-11% as increased sales levels should provide leverage.

6) For the past year, the video game software industry faced slower sales as consumers waited for new game console systems, which are now on sale. If you look at the 2nd and 3rd Q performance, they indicate that the video game market is still healthy.

I’m a fundamentalist first but from a technical perspective, investors need to keep an eye on EA’s technicals. If you visit this link of EA’s chart, you will notice the 12-day almost breaching the 26-day MA and OBV pointing toward. Keep an eye on this as it could mean a little pull-back is in play, which would be healthy.

Today in GME’s report there were some crucial tidbits for ERTS investors.

"FQ4 SSS should be up 14-18%, driven by PS3 shipments, which are coming in weekly. The small number of PS3s available overall mean that these won’t have much impact on quarterly earnings, but the upside heading into the new fiscal year should be strong."

• I’d like to point out that for the FY ending March 31 07, EA said it expects revenue of between $2.95 billion and $3.13 billion, up from previous company forecasts of $2.8 billion to $3 billion.
• GME was up after-hours on those details quoted above because FY 07 will be good and EA will have enough time for its games to be bought, especially the Madden NFL franchise, as well as The Sims and licensed games, such as The Lord of the Rings.

In the end, ERTS can see some pin-action today from GME’s numbers yesterday.

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