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Three Reasons Not to Play Electronic Arts


Two words for the company: valuation, visibility.

Asian stocks rose overnight. The Hang Seng and the Nikkei were up 0.27% and 0.63%, respectively. European stocks were, however, a bit of a mixed bag early this morning. And here in the US, we're currently trading higher.

Here's what I'm focused on this morning:

Electronic Arts (ERTS):
The publisher of video games was out with its second-quarter numbers. Excluding items, it put up $0.06, which wasn't too swift because the estimate I'm seeing was for $0.07. However, its adjusted revenue appeared to be a bit better than expected.

My take:

1. For a while now, the two bones I have to pick with the company are valuation and visibility as far as future earnings are concerned. And not much has changed. It's not hyper expensive, but it's not cheap, either, at 21.9 times this year's estimate.

2. I'd still like a clearer picture as far as what to expect a year or two out before playing this game.

3. While the company did say in the release: "Non-GAAP diluted earnings per share is expected to be between $0.70 and $1.00 and EA expects to be profitable in both Q3 and Q4," that doesn't really inspire me. The Street is at $0.89.

Bottom line: I won't be playing any time soon.
Excluding items, the company I'll forever associate with William Shatner in a tight suit, put up $3.45 in the third quarter, which was a country mile better than the $2.92 analysts had been looking for.

To boot, it indicated that its targeting fourth quarter "Pro forma net income of between $1.52 and $1.62 per diluted share," which sounds decent to me. I'm noticing the Street is at $1.49.

But then again, I do have a little trouble cozying up big, given the shares have come a long way and because it trades at more than 23 times this year's estimate.

I look at this as a potential short-term trade. My thinking is that maybe the analyst community will be goosing their estimates over the next few days. I also think that institutions may want to jump on this winner, which could gas the stock, too.
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No positions in stocks mentioned.

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