Street Cuts EA Some Slack

Most analysts still see Electronic Arts well-poised for a post-transition bounceback.
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For all that it seemed to matter to Wall Street,

Electronic Arts'

(ERTS)

latest earnings report was a nonevent.

After the bell Thursday, the video-game giant posted worse-than-expected results and cautioned investors to expect more trouble ahead in the coming year. Although the report marked the sixth straight quarter in which the company has offered disappointing guidance, it seemed to change few minds on the Street.

Analysts largely reiterated their mostly positive ratings on EA's shares. And the stock traded up on Friday.

Instead of focusing on the company's recent performance or on its expectations for its coming fiscal year, most analysts in their reports on Friday pointed to the company's potential earnings power in fiscal 2008, which begins a year from this April.

Noting that EA and the industry are currently going through a transition to new video-game technology, Wedbush Morgan Securities analyst Michael Pachter said the company will be in a good position once all the new video-game machines are in the market.

"We think that once the next-generation console launches are behind us and production is sufficient to satisfy demand, consumers will embrace the new technology and software sales will grow rapidly," said Pachter, reiterating his buy rating on EA's shares. "We continue to believe that Electronic Arts is a

fiscal 2008/2009 story."

Wedbush Morgan has not done recent investment banking business for EA.

Based on the company's recent results and its expected results for fiscal 2007, EA is trading at a higher multiple than it has in the past, noted American Technology Research analyst P.J. McNealy. Despite this, the time to buy the stock is now, McNealy said, also reiterating his buy rating on EA shares.

"Multiples for the video-game publishers have historically expanded toward the beginning of video-game console cycles," noted McNealy, whose firm does not do investment banking. "In simple terms, investors who have bought the video-game stocks after misses in video-game hardware console transition years have historically done well."

Perhaps reflecting such bullishness, EA shares rose on Friday. In recent trading, the stock was up 94 cents, or nearly 2%, to $54.52.

In its fiscal third quarter, which ended Dec. 31, EA earned $259 million, or 83 cents a share. That was down from the year-earlier period, when the company posted a profit of $375 million, or $1.18 a share.

Sales fell 11% year over year to $1.27 billion.

Excluding certain amortization and restructuring charges, EA would have earned $268 million, or 86 cents a share, in the just-completed period.

On this basis, analysts polled by Thomson First Call were expecting the company to earn 90 cents a share on $1.26 billion in sales.

That forecast, though, reflected the company's earnings warning in December, when it cautioned investors that holiday quarter results would be "well below" its earlier targets.

Looking forward, EA expects to lose 15 cents to 23 cents a share in the current quarter on sales ranging from $550 million to $600 million.

Excluding costs related to its planned acquisition of mobile-phone game publisher

Jamdat

(JMDT)

, restructuring charges and a tax on foreign earnings, the company expects to earn 6 cents to 14 cents a share.

Excluding those expenses, Wall Street had previously predicted that the company would earn 14 cents a share on sales of $625 million in the current period. On a GAAP basis, the company earned $8 million, or 2 cents a share, on sales of $553 million in the fiscal fourth quarter last year.

To be sure, not everyone on the Street was looking past EA's disappointing report. Citigroup analyst Elizabeth Osur, for instance, noted the company's consistently underwhelming guidance in recent quarters. The company has also fallen far short of meeting its goal of growing earnings and revenue during the technology transition, she said.

"We believe that shares look expensive and news flow could remain negative for some time," said Osur, whose firm has not done recent investment banking for EA.

Likewise, Janco Partners analyst Mike Hickey noted that in the last two fiscal years, EA's actual results have fallen far shy of the company's initial predictions. That doesn't bode well for fiscal 2007, consider that the company is already warning of potentially slow sales and increased spending next year, he said.

"We remain bearish on the company's shares," Hickey said.

But, as Hickey suggested, it's not like EA's report changed his mind. Hickey has had a sell rating on EA for much of the last year, and he maintained it Friday. Likewise, Osur maintained the hold rating she's had on EA since the company's warning in December.