No 'Halo' Fears at Electronic Arts

It expects to top estimates with new titles and expansion plans.
Author:
Publish date:

Despite the attention lavished on

Microsoft's

(MSFT) - Get Report

Halo 3

, video game publisher

Electronic Arts

(ERTS)

is doing just fine.

The Redwood City, Calif.-based company is enjoying another good run with the latest version of

Madden NFL

, its long-standing football franchise, which topped the charts shortly after its release in August. It has also developed a new title, Skate, that sold 175,000 copies and ranked fifth among the top 10 best-selling video games in September.

It's no wonder that EA's second-quarter results will not come as a surprise to company watchers. The world's largest games publisher said last month its numbers will run ahead of expectations, even as it announced

plans to buy two game-development studios for $860 million in a bid to strengthen its position in one of the games industry's biggest genres: online role-playing games.

EA shares are trading near their 52-week high of $61.62. The stock closed up $2.12, or 3.6%, to $61.12 Wednesday.

Shares have been up 25.6% in the three months since Jul. 31. Meanwhile, smaller rival

Activision's

(ATVI) - Get Report

shares rose 38.2% in the same period.

Despite trading near its highs, EA's stock still has plenty of potential, says Dan Ahrens, portfolio manager with the Ladenburg Thalmann Gaming and Casino Fund, which holds shares of EA in its portfolio.

"I still feel very good about the company because they have been very good at turning things around in the last six to nine months," says Ahrens. "And while the stock is near its 52-week high it is important for investors to realize it is just returning to prices it was at nearly a year or two years ago so there's still plenty of upside left."

Most importantly for investors, EA is showing signs of getting back its groove, he added.

The company was criticized earlier this year for not having enough games for Nintendo's hot-selling Wii console and a lack of innovation.

But Ahrens says EA is past that period and readying to bring a slew of new titles to the market in the holidays and working on more for next year. "You have to credit management with aggressively fixing the issues."

During the second quarter, EA released such key games as:

Madden NFL 08

, which

topped the charts in August, and continued to perform well in September despite the release of

Halo 3

and its skateboarding themed title

Skate

.

Skate

, which released on Sept. 14, competes with Activision's

Tonk Hawk

game franchise.

The new titles and older games from the company's stable should help EA post strong second-quarter numbers. Analysts polled by Thomson Financial expect revenue of $896.16 million, up from $784 million a year ago and earnings of 20 cents a share, a penny higher than the 21 cents a share the same quarter a year ago.

With apparently solid second-quarter results, which EA reports on Thursday, investor attention will focus on the company's outlook for the third quarter, which coincides with the holidays and is the biggest video-game sales season of the year.

EA recently said it will delay the release of its third-person shooter game,

Army of Two

, into early 2008--a prospect that has fueled concerns that it could affect EA's results negatively.

For the third quarter, analysts expect revenue of $1.61 billion and earnings of 94 cents a share, compared to $1.28 billion and earnings of 63 cents a share.

Some of the fears may be unfounded, says Todd Greenwald, an analyst for Nollenberger Capital. Nollenberger does not own shares or have an investment banking relationship with EA.

"Army of Two is one of the approximately 15 titles EA will ship in the quarter, and there still are several titles (such as

Rock Band

,

The Simpsons

and

Crysis

) that should drive growth," says Greenwald in a research note. "We estimate that with $150 million in co-publishing revenue, EA needs just 13% core growth to achieve overall growth of 25%."

Ahrens agrees that despite a few hiccups EA will fly high during the holiday season. "We have just come through the summer quarter and going into what's the best season for video games," he says. "And factors like worries about economic spending and slowdown do not affect game sales so EA will perform well with its new releases."

EA has another potentially significant catalyst waiting in the wings. The company is working on a new game,

Spore

, which is scheduled for release early next year and may offer more details about the development progress of the game in its conference call with analysts Thursday.

Spore

, which was created by game designer Will Wright, who also gave EA its mega-hit

The Sims

, should keep investors in the stock, says Greenwald. "We believe this game has huge potential, especially as it comes out across multiple platforms including the PC, DS, Wii and cellphones."