Electronic Arts Inc. (EA) Annual Valuation

moneyCompany Profile (obtained from Google Finance): Electronic Arts Inc. develops, markets, publishes and distributes game software content and services that can be played by consumers on a variety of video game machines and electronic devices. The Company provides games for mobile devices and Internet-only games, such as its free-to-play offerings that are available only through online and wireless delivery and also offers multi-player online games and game services on a free-to-play and subscription basis. The Company’s portfolio of brands includes wholly owned brands, such as Battlefield, Mass Effect, Need for Speed, The Sims, Bejeweled, and Plants v. Zombies. Its portfolio also includes brands based on licensed intellectual property, including sports-based brands, such as Madden NFL and FIFA. The Company operates development studios (which develop products and perform other related functions) in North America, Europe, Asia and Australia.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 1/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years – FAIL
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 1/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – FAIL
  4. Dividend Record – currently pays a dividend – FAIL
  5. Earnings growth – EPSmg greater than 5 years ago – FAIL

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $7.88
MG Opinion Overvalued
Value Based on 3% Growth $2.97
Value Based on 0% Growth $1.74
Market Implied Growth Rate 54.63%
Net Current Asset Value (NCAV) -$1.33
PEmg 117.75
Current Ratio 1.26
PB Ratio 3.26

Balance Sheet – 9/30/2013 

Current Assets $2,340,000,000
Current Liabilities $1,851,000,000
Total Debt $570,000,000
Total Assets $5,036,000,000
Intangible Assets $1,942,000,000
Total Liabilities $2,750,000,000
Outstanding Shares 309,000,000

Earnings Per Share

2014 (estimate) $0.98
2013 $0.31
2012 $0.23
2011 -$0.84
2010 -$2.08
2009 -$3.40
2008 -$1.45
2007 $0.24
2006 $0.75
2005 $1.58

Earnings Per Share – ModernGraham 

2014 (estimate) $0.20
2013 -$0.51
2012 -$1.11
2011 -$1.69
2010 -$1.81
2009 -$1.27

Conclusion:

Electronic Arts creates some great video games, but it has not demonstrated the business results that value investors like to see.  In particular, the only thing the Defensive Investor likes about EA is the market cap, while the Enterprising Investor only likes the earnings growth over the five year period.  The company fails all of the other requirements of Defensive Investors and Enterprising Investors.  As a result, value investors seeking to follow Benjamin Graham’s methods should spend some time researching other companies, such as Microsoft Corp (MSFT).  From a valuation perspective, the company has grown its EPSmg from -$1.27 in 2009 to an estimated $0.20 for 2014, but that level of growth does not come anywhere near supporting the market’s current estimate of 54.63%.  Therefore, the company appears to be overvalued at the current time.

What do you think?  What value would you put on Electronic Arts?  Is the company not suitable for Defensive Investors or Enterprising Investors?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Electronic Arts (EA) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Photo Credit:  Andrew Magill


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