Street Mixed on Electronic Arts (ERTS) Following Purchase of PopCap

Analysts remain mixed on shares of Electronic Arts (Nasdaq: ERTS) following news Tuesday afternoon the company plans to acquire PopCap Games. In addition to the M&A action, EA also released preliminary first-quarter results and raised its fiscal 2012 revenue guidance.

Investors are selling the stock Wednesday morning; ERTS shares last traded at $24.03, down 0.6 percent from Tuesday's closing price.

Let's take a look at what analysts have to say:

• Wedbush maintains an Outperform rating and $27 price target. The firm does not believe the acquisition will have any effect of the company’s earnings for fiscal 2012, but forecasts a $0.10 per share rise in fiscal 2013. Wedbush raised its FY12 revenue and EPS estimates from $4 billion and $0.92 to $4.05 billion and $0.94, respectively, amid the new guidance. The firm maintains its FY13 estimates..
  
  Through buybacks and digital growth, Wedbush sees Electronic Arts growing EPS by $0.20 over the next two years. "We view this acquisition as a long-term positive; though the costs may be high, the opportunities in digital casual gaming are large and growing much faster than EA’s traditional packaged goods business. PopCap strengthens EA’s leadership in casual gaming and accelerates EA’s progress toward its goal of $1 billion in digital revenue."
  
  
• Brean Murray Carret & Co. reiterated its Hold rating and raised its price target by $1 to $25, reflecting estimate increases. The firm raised its FY12 revenue estimate from $3.8 billion to $4 billion while maintaining an EPS estimate of $0.90. Also raised its fiscal 2013 revenue and EPS estimates from $4.1 billion and $1.10 to $4.3 billion and $1.20, respectively.
  
  Brean Murray said, "We believe that EA has a significant amount of operating leverage built into its P&L this fical year from the launch of its “Star Was MMO” and that guidance for the year remains conservative. However, we remain skeptical of EA’s strategy for transitioning to digital and cautious in our longer term outlook for revenue growth and margin expansion."
  
  
• Deutsche Bank continues to rate shares of Electronic Arts a Sell with a price target of $15. The firm believes investors should look at the PopCap acquisition in three ways, "(1) EA paid 36x CY11 EBIT and 20x CY12 EBIT (vs. EA at 21x FY12/CY11 EBIT), representing a lofty multiple for a 35% growth rate. (2) Investors have expected share buybacks from a capital allocation standpoint, but it now seems EA is moving back to M&A again. (3) While June qtr was better vs. ests, there seems to be little flow-through to FY12, suggesting that core business profit target need to be lowered."
  
  Deutsche believes the acquisition will contribute $75 million in revenue and $0.03 in earnings to the company's fiscal 2013 results, but nothing to the current years. The firm sees the deal as inline with the company’s plans, but does not anticipate the market liking the news as investors have only been looking for share buybacks at this time.

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