Electronic Arts Estimates "Too High"--Sell

Electronic Arts (ERTS) has generated some optimism lately by posting solid growth and earnings upside. Deutsche Bank, however, reiterates its Sell, citing valuation:

we believe that FY09E EPS estimates remain too high at $1.75 (and DB at $1.58), due to the fundamental trends plus far too much optimism via consensus earnings. While the earnings estimates for FY09E look demanding, we highlight that shares of EA trade at >20x NTM EBIT, vs. 10x in the same period last cycle (2003).

DB suggests that ERTS has a history of trading at unreasonable multiples and then settling back down to a more reasonable valuation:

Our work shows Street consensus EPS tends to be optimistic on EA, as evidenced by 50%+ downward revisions over time. While EPS ests have dramatically lowered over time, ERTS shares have been flat for years., leading to an NTM EBIT multiple of 24x, vs. 10x‐12x in early ’03. Surprisingly, EA was beating expectations back in ’03/early ’04 whereas earnings have come in light of late.

It’s not all doom and gloom, however. DB sees some potential upside to FQ4:

We anticipate upside to our F4 ests ($825mn/breakeven EPS) by a solid amount due to RockBand dist., weak dollar and solid sales of Army of Two. However, lower interest income, higher COGS and opex for FY09E may result in EPS lower vs. our $1.58 EPS estimate.

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