Electronic Arts Upgraded

Electronic Arts jumped nearly $3 yesterday on an analyst upgrade. Wedbrush Morgan raised ERTS to a “buy” from a “hold,” and analyst Michael Pachter set a price target of $66 which seems pretty conservative. Earlier this year, the stock got as high as $71 (pre-split), but it plunged 17% in March after it warned of lower earnings growth.

Looking ahead, Pachter said video game publishers should see expansion during the next three months as excitement builds toward the release of the new Xbox from Microsoft Corp. Electronic Arts has also invested heavily in research and development — which now stands at about 22 percent of annual sales — to meet demand for next generation games.
Electronic Arts also is expected to benefit from games it makes for the Sony Corp.’s new PlayStation Portable. In addition, the company is seen benefiting from a potential price cut in the PlayStation 2 console.
Another key selling point for the stock is that rival Take-Two Interactive Software Inc. has been having problems. Earlier this month, Take-Two said its loss doubled in the fiscal third quarter, hurt mostly by reserves set aside for returned copies of “Grand Theft Auto: San Andreas,” the hit game that came under intense scrutiny for a downloadable hack that unlocked sexually explicit material.

The stock is pretty pricey. The company has forecast earnings of $1.45 to $1.60 a share, which comes to a p/e ratio of 37 to 41. Electronic Arts is a great company, but I don’t see it growing its earnings that fast to justify the current price.

Posted by on September 13th, 2005 at 6:53 am


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