ModernGraham Valuation Of Electronic Arts Inc.

Jan.19.14 | About: Electronic Arts (EA)

Here is a look at how Electronic Arts Inc. (NASDAQ:EA) fares in ModernGraham's opinion, based on an updated and modernized version of Benjamin Graham's requirements of defensive and enterprising investors from The Intelligent Investor:

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
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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
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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
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Earnings Per Share - ModernGraham

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

Disclosure: 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.