Electronic Arts: Clear Example of Manipulation?

It came as no huge surprise that Electronic Arts (ERTS) reported a very rough third quarter, as they had warned of a tough holiday season and analysts have lowered estimates 4 times in the last month according to Yahoo! finance. However, the actual results were worse than even the most pessimistic of analysts estimates, as the company reported a net loss of $641 million or $2.00 per share. Much of the loss can be attributed to an ongoing restructuring effort at the company. In addition, the company affirmed that they will cut 1100 jobs and close 12 factories, as well as narrowing its product offering. Not including these restructuring charges the company earned 56 cents per share compared to consensus estimates of 88 cents. Even the most bearish of estimates called for 67 cents, apparently EA’s warnings were not stern enough.

Electronic ArtsSo, after the stock rose more than 4% during regular trading prior to reporting, one would expect to see EA take a serious haircut after hours. However, the reality is far different, as more than an hour after the company reported shares are up more than 6%. I began to search for something to cause this optimism, was it revenue? Nope, it missed by nearly 15%. Was it an positive outlook going forward? Quite the opposite, as the company slashed its earnings guidance for the next quarter to a loss of 35 cents per share. The company had already lowered fiscal 2009 guidance to $1 EPS from $1.40. The company’s 3Q results seem to fly directly in the face of the idea that the video game industry is particularly recession resistant.

When a stocks price movement simply does not mesh with the underlying company’s performance there is one prime suspect, manipulation by the large institutional investors. The percentage of shares held by institutions is 85% and the percentage of float held by institutions is 97%, again data according to Yahoo! finance. We wish we could say that the upward price movement is because the bad news had already been priced in, but it is hard to make that argument because the results were worse than even expected. So, what does this mean? Be prepared for a serious sell off in tomorrow morning trading as this movement is simply unfounded. Ockham has placed a Greatly Undervalued valuation on Electronic Arts as they are best of breed and undervalued compared to historical norms, but at this point buyer beware, because it could get ugly tomorrow as institutions may begin dumping some shares.

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Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

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