Electronic Arts Can Get Past its Problems

The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.

Maintaining our OUTPERFORM rating, but raising our 12-month price target to $25 from $23. Our revised price target reflects a forward multiple of ≈ 16x our FY:14 EPS estimate of $1.58. This multiple is in-line with industry peers, and reflects an improving outlook for the video game publishers ahead of the launches of the next generation consoles, likely later this year.

Last week, EA’s CEO resigned unexpectedly. John Riccitiello, CEO and Director since April 2007, resigned from both positions effective March 30. In the press release, EA (NASDAQ:EA) disclosed the parties had decided it was the right time for a leadership transition; however, in his resignation letter, Mr. Riccitiello attributed his decision to accountability around guidance. It appears that the company’s board was impatient with EA’s capital management and long turnaround; however, Mr. Riccitiello did oversee many notable achievements, including robust digital growth and a more streamlined release slate, among others.

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In addition, EA preannounced negative Q4 results last week. EA expects Q4 to come in at the low end of, or slightly below, financial guidance for revenue of $1.025 – 1.125 billion and EPS of $0.57 – 0.72. Catalog, Dead Space 3, and Crysis 3 may have underperformed slightly, with sluggish pre-orders for Army of Two. SimCity could not offset the weakness in spite of over 1.1 million units sold in two weeks. In response, we lowered our estimates…

Maintaining our FY:13 estimates. Maintaining our estimates for revenue of $3.78 billion and EPS of $0.85, compared to consensus of $3.80 billion and $0.90, and guidance of $3.778 – 3.878 billion and $0.86 – 1.00 billion and EPS of $1.58, compared to consensus of $4.12 billion and $1.12. No comparison in FY:13, including Battlefield 4, Fuse (May 28), a likely UFC title and a likely NBA title. Battlefield 4 alone should account for $400 million or more of revenue growth, plus $200 million in contribution from the other titles and, at worst, flat digital sales growth; EA can hit our revenue estimate even if the rest of the lineup sees sales down 10% compared to FY:13. We think the company will likely deliver upside to our estimates.

Michael Pachter is an analyst at Wedbush Securities.

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