Electronic Arts (EA) has a troubling balance sheet. Even with the stock near 52-week lows, this company is in need of a real game changer. With some reprises of their most popular lines, this could be the pivotal time for management to turn the company around.
Looking at the balance sheet, there are some serious issues that management needs to address. Looking at the liabilities, there is a glaring problem. Over the last three years EA's liabilities have grown by more than 50% in that time. Newly issued long term debt accounts for 48% of that increase. If EA's assets were growing at the same rate, it would be perfectly acceptable. Unfortunately, the assets are only growing 18% over those same three years.
To make matters worse, included in those assets is a growing rate of Goodwill. Goodwill is a portion of the assets that the company deems too important to lose, and are considered to add that much value to the company. Steve Jobs and Jonathan Ive were both included on Apple's (AAPL) balance sheet under Goodwill for their contributions to the company at one point. EA's Goodwill has grown by 70% to $1,718,000 over the past three years. That $1.7 million in Goodwill comprises 31% of EA's total assets. That is a dangerous amount of leverage the company has locked up in Goodwill.
However, the fundamentals of EA are very strong. They have a forward P/E of 11.23, a PEG ratio of .73, a P/S of 1.09, and current EPS of $.17. Wait, an EPS of $.17? That means EA's current P/E is 81.94. How can that be a strong fundamental? Take a look at the forward P/E and the current P/E. It shows phenomenal revenue growth for the company is underway.
Where is this growth coming from? In the current quarter they have reprised some of their most popular titles, with a game changer coming next quarter. Between the popular titles of NCAA football and Madden football, EA can expect to have a very strong earnings release on October 28th. A highly anticipated reprise of Medal of Honor, a major revenue generator for EA, has a release date of October 23rd. The game is sure to be a major success as gamers have been clamoring for the sequel for over a year.
There are reasons to be concerned with Electronic Arts' balance sheet, but the release of three of their most popular titles within a four month span should be enough to turn this company around quickly. Medal of Honor was a major success when it was first released, and it is sure to repeat that performance again. With the company near a 52-week low, this is a company I want to be in before the next earnings release.
Disclosure: I am long AAPL.
Additional disclosure: Investing always involves a certain level of risk. As such, never invest more than you can afford to lose. Always consult a financial professional before adding a position to your portfolio.