Herb Part 2: Comparing THQ With Electronic Arts

Why you can't out-of-hand compare one company's earnings and stock with another's.
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One of my worries about message boards is that all too often they are the source of spreading misinformation. Take, for example, a post on my

TheStreet.com

boards the other day by someone who was trying to pump

THQ

(THQI)

, the video-game maker. The poster noted that

Electronic Arts

(ERTS)

, the industry leader, is expected to earn $1.88 per share this year and trades at around 80 while THQ is estimated to earn $2 for the year, yet trades for less than 20. "No," he wrote, "That's not a typo."

No, that wasn't a typo, but it also

is

irrelevant. Trying to compare the earnings and stock targets of two companies of such vastly different sizes is like trying to compare a tomato with an onion. Nevermind that Electronic Arts, which has a history of performance, has $1.5 billion in annual revenue. And nevermind that unlike THQ, Electronic Arts was built on its own content -- not content licensed from others (which means it controls much of its content). Nevermind that Electronic Arts is considerably more liquid, or tradable, than THQ. And nevermind that, based on its history, investors believe that Electronic Arts will keep growing. Oh, and nevermind that Electronic Arts has $250 million in cash compared with around $26 million for THQ.

Electronic Arts gets the fat premium (and trades at 44 times this year's expected earnings vs. 10 times for THQ) because it has clout and a history with retailers and distributors. But a bigger plus is that it's moving into online gaming, and will soon create a tracking stock for its Internet operation.

America Online

(AOL)

has agreed to buy 10% of the tracking stock and warrants to buy an additional 5%. That tracking stock has added another $30 to $50 to Electronic Arts' stock price. Without the tracking stock, some analysts figure, ERTS would be trading for around $40.

Thanks:

To all who appeared to like my

Tips for the Timid column, which showed how to get an early warning on stock shenanigans. You offered plenty of ideas and tips of your own, which will be included in future columns. Hey, and if you're a money manager, how about sharing a story about why a favorite stock pick soured or why you decided

not

to buy a stock that later cratered. Both would be very educational to investors.

Be sure to check out Part 1 of Herb on TheStreet.

Herb Greenberg writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at

herb@thestreet.com. Greenberg also writes a monthly column for Fortune.

Mark Martinez assisted with the reporting of this column.