Electronic Arts shares ready for a comeback

Electronic Arts Inc. (NASDAQ:ERTS) shares fell Friday despite Video Games sales rising in October. Shares of ERTS are $1 away from a new 52-week low and for long-term investors, there's hope with Rock Band, EA Sports Active, and lowered expectations.

Investors have bailed on Electronic Arts in recent months, the stock price is down 57% in the past 3 months, from the $50 range all the way down to $20.  Just last month Electronic Arts Inc. reported a $310 million loss, or 97 cents per share, in the quarter, the second in its fiscal year. That was worse than the loss of $195 million, or 62 cents per share, a year earlier.

However sales jumped and impressive 40% to $894 million. Excluding one-time items, EA says it lost 6 cents a share in the latest quarter, matching the expectation of analysts polled by Thomson Reuters.

Adjusted sales, which exclude deferred revenue for some online games, were $1.13 billion, beating expectations for $1.08 billion. 

"Considering the slowdown at retail we've seen in October, we are cautious in the short term," said John Riccitiello, chief executive, in a statement. "Longer term, we are very bullish on the game sector overall and on EA in particular."

That statement came true on Friday after sales of video games rose in October, according to NPD Group. The industry is still poised to do $22 billion in sales in 2008, NPD estimates.

Think long-term investing if that's possible right now, because not only does EA have hit game titles "Spore" and "Madden NFL 09", get ready for “EA Sports Active,” which will have tennis, boxing, soccer and other “sports” for people to play using wireless controllers attached to their limbs. The games — to be sold for about $60 — will work on Nintendo’s Wii platform and they’ll come with a book about healthy eating, too.
Electronic Arts is taking a play from "Wii Fit" playbook, and they'll be able to steal some market share away from Nintendo, which in the end, will help their stock price.

Then there's “Rock Band”, its sales have disappointed some industry watcher, but the holiday season is just right around the corner.  

There's also EA's latest release "Mirror's Edge" that is generating buzz with its own unique spin on first-person action adventure games.

EA lowered its full-year profit outlook range because of the strengthening dollar and the delay of the latest "Harry Potter" game, though it kept its revenue forecast intact. The company expects to earn between $1 and $1.40 during the fiscal year, excluding items, down from its previous forecast of $1.30 to $1.70 in adjusted earnings. On this basis, analysts are predicting a profit of $1.42 for the year.

EA is also said last month they are planning on cutting 500 to 600 positions across all functions and locations. While some of these jobs are open, most will involve layoffs. The company said it expects about $50
million in annual pretax cost savings as a result.

This is just what the doctor ordered, the company is cautious, cutting costs, the industry is still holding up, the stock is cheap, and the future game titles look solid.

Tim Hansen from fool.com called Electronic Arts an outrageously cheap stock last week, here's his reasons:

1. A balance sheet with lots of cash and little to no debt.
2. An EV/EBITDA ratio less than 4.
3. A business with the financial strength and strategy to survive and thrive in a down economy.
4. No potential for massive writedowns.
5. A stock that's been pummeled.

Investors looking to get back in the game with less subprime exposure? Electronic Arts (ERTS) is worth your attention, game on.