Electronic Arts Shares LEFT 4 DEAD

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Electronic Arts (ERTS)

Electronic Arts Inc. (NASDAQ:ERTS) has received as much negative attention in the last 2 days as TARP or our failing U.S. Auto Industry, but a warning and a lack of a guidance isn't enough to throw ERTS under the bus.

EA LEFT 4 DEADToday is showing Wall Street that investors are still interested in Electronic Arts after shares dropped from $22 to $16 since Monday, shares are up 2.8% but its hardly a glimmer of hope for shareholders who had positions before ERTS world fell apart.

Yesterday the downgrades came in like crazy, rapid fire if you will and then by the end of the day, just like EA's latest hot title, ERTS shares were 'LEFT 4 DEAD'.  Such a lovely game cover, I guess they won't be using the Fonzie hand model on this title.

Hands aside, just about every analyst gave Electronic Arts the middle finger yesterday, one after the next, downgrade, after downgrade, after target price reduction:

 

11-Dec-08 Reiterated Hilliard Lyons Long-term Buy $33
10-Dec-08 Reiterated UBS Neutral $24 → $20
10-Dec-08 Reiterated Kaufman Bros Buy $42 → $27
10-Dec-08 Reiterated Deutsche Securities Sell $19 → $13
10-Dec-08 Downgrade Wedbush Morgan Strong Buy → Buy $38 → $25
10-Dec-08 Downgrade Piper Jaffray Buy → Neutral
10-Dec-08 Downgrade Pacific Growth Equities Buy → Neutral
10-Dec-08 Downgrade Citigroup Buy → Hold $31 → $21
10-Dec-08 Downgrade Banc of America Sec Buy → Neutral $18
10-Dec-08 Downgrade Banc of America Sec Buy → Neutral

 

"Almost 11 weeks into the third quarter, it now appears we will be coming in with revenue significantly below our guidance," Chief Executive John Riccitiello said on a conference call with analysts. "We saw a big improvement in the quality of our games, but that hasn't translated into enough sales."

EA executives said on a conference call that October and November game sales were comparing well to last year's comparable months. But since December, some major retailers are seeing softness in game sales, and have opted to have fewer weeks of inventory on hand than they normally would.

To some extent, the warning was expected, what hurt ERTS shares was zero update its October forecast, in which it lowered its earnings target but maintained its sales view.  Electronic Arts plans to give an updated forecast when it releases its fiscal third-quarter results in early February.  Big swing and a miss for investors.

ERTS 

Riccitiello noted that costs would be cut to help the company become profitable, including cutting out lesser-performing titles from its product portfolio for the fiscal year starting April 1, resulting in job cuts and facility consolidations. It will then plow more marketing and research-and-development spending into its top performing titles, as well as its higher-margin online games. Also, some games' prices may also be reduced to goose sales.  

Electronic Arts is cutting costs and jobs are going to go, there's just no way around it. Additional job cuts beyond the 6% EA announced in October:

 


Now that ERTS is down to $17 and change a share, there's room to impress Wall Street going forward.  Think long-term if you are on the fence about buying ERTS today and for those of you that had shares before the crash, its understandable if you are bailing.

Yesterday Barron's Eric Savitz said:
Is Walt Disney Co. (NYSE:DIS) preparing a bid for Electronic Arts Inc.? Disney Chief Financial Officer Tom Staggs appeared to leave the door open Tuesday. When asked about Disney’s focus on developing games in house versus buying another company, he told an investor, “I don’t want you to conclude that those are in the long term mutually exclusive.” Moments later he noted a “strategic and attractive” opportunity would be “a possibility.”

The action in the stock, however, suggests the Street is ignoring this possibility, which is not surprising given EA’s uncertain outlook.

Speculation can only get you so far, but lame 3% rally today for ERTS is showing that the company shouldn't be LEFT 4 DEAD.

Disclaimer: No positions in any of the securities mentioned in this publication.

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