Is Electronic Arts Really the Worst Company in America?

With shares of Electronic Arts Inc. (NASDAQ:EA) trading at around $22.80, is EA an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

To immediately answer the question in the title, absolutely not. EA might have had several missteps over the past several years, and it’s no secret that revenue has been a major problem, but the worst company in the world doesn’t have a positive profit margin, a strong balance sheet, increased revenue guidance, a decent product pipeline, increased online exposure, increased social and mobile exposure, consistent annual earnings improvements, and a 75 percent increase in the stock price over the past year.

The big news for Electronic Arts right now is Fuse, which is a sci-fi shooter. The PS3 and Xbox 360 versions of Fuse have received mixed reviews. Below is a very quick breakdown of the most commonly reported positives and negatives:

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Positives:

Weapons

Co-Op Action

Negatives

Team A.I.

Confusing Tone

Yeah, that was quick. In regards to weapons, gamers have greatly appreciated the creativity, such as a mag shield that can absorb bullets and then fire them back at enemies.

While Fuse’s potential success is still a guessing game, there is no doubt that Electronic Arts landing a deal with The Walt Disney Company (NYSE:DIS) for video gaming rights to Star Wars was a big splash. Star Wars has been a massively popular franchise for decades. What most people don’t realize is that the franchise still has potential to grow, especially under Disney’s leadership.

Electronic Arts is facing competition from free-to-play games, but its PopCap Games is now offering Plants vs. Zombies Adventures on Facebook (NASDAQ:FB). This is free-to-play, but in-game items are being sold. Other PopCap Games include Bejeweled, Bookworm, and Zuma. There are 42 other games as well.

The chart below takes a look at some basic fundamentals for Electronic Arts, Activision Blizzard (NASDAQ:ATVI), and Take-Two Interactive Software (NASDAQ:TTWO).

EA ATVI TTWO
Trailing P/E 74.10 13.21 N/A
Forward P/E 16.29 13.92 15.09
Profit Margin 2.58% 24.38% -2.43%
ROE 4.15% 11.09% -5.27%
Operating Cash Flow 324.00M 1.52B -4.57M
Dividend Yield N/A 1.30% N/A
Short Position 5.30% 1.90% 17.40%

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

T = Technicals Are Strong

For the worst company in the world, Electronic Arts sure is beating expectations when it comes to stock performance.

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1 Month Year-To-Date 1 Year 3 Year
EA 27.60% 57.78% 75.29% 44.91%
ATVI -6.39% 35.56% 23.58% 38.56%
TTWO 2.93% 46.59% 48.07% 46.33%

At $22.80, Electronic Arts is trading above its averages.

50-Day SMA 20.13
200-Day SMA 17.16

E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio for Electronic Arts is stronger than the industry average of 0.30.

Debt-To-Equity Cash Long-Term Debt
EA 0.25 1.68B 559.00M
ATVI 0.00 4.62B 0.00
TTWO 0.57 402.50M 335.20M

E = Earnings Have Improved

Earnings have consistently improved on an annual basis. However, revenue has been very inconsistent.

Fiscal Year 2009 2010 2011 2012 2013
Revenue ($) in millions 4,212 3,654 3,589 4,143 3,797
Diluted EPS ($) -3.40 -2.08 -0.84 0.23 0.31

Looking at the last quarter on a year-over-year basis, revenue and earnings both declined. On the other hand, revenue and earnings made substantial improvements on a sequential basis.

Quarter Mar. 31, 2012 Jun. 30, 2012 Sep. 30, 2012 Dec. 31, 2012 Mar. 31, 2013
Revenue ($) in millions 1,368 955 711 922 1,209
Diluted EPS ($) 1.20 0.63 -1.21 -0.15 1.05

Now let’s take a look at the next page for the Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

Conclusion

Investors are frustrated with Electronic Arts due to its inability to come up with new titles. Retail gaming sales have also been weak. Another negative is that Electronic Arts is trading at 74 times earnings whereas the industry average is only 7 times earnings. That said, all the positives mentioned earlier should also be considered.

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Electronic Arts is far from the worst company in America. However, it has failed to meet its full potential in recent years.

All factors considered, Electronic Arts is a neutral WAIT AND SEE.

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All content posted should not be considered professional advice. Please do your own research and consult with a professional financial advisor before making any investment decisions. I don’t have any positions in this stock.