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ERTS Slips As Goldman Downgrades

Electronic Arts (ERTS) shares are trading lower this morning after Goldman Sachs analyst Mark Wienkes cut his rating on the shares to Neutral from Buy. His price target drops to $21, from $25.

Wienkes writes that his EPS estimates for the March 2010 and 2011 fiscal years are “no longer ahead of consensus,” and that a turnaround in the business “will take longer than we had anticipated.” Wienkes adds that he sees greater near-term price appreciation potential in other stocks.

He notes that since the stock was added to the Buy list on September 2007, ERTS is down 65%, versus a 31% decline for S&P 500 and a 29% drop for the video game sector overall, “with the under-performance reflecting the subdued turnaround execution.”

“We still see value in ERTS shares and believe the company is on track to meet its $1 FY 2010 EPS target, notwithstanding revenue pressure from aging franchises,” he writes. But he adds that EA’s announced restructuring moves “are unlikely to be deep or broad enough to meaningfully drive improved returns over a sustained period.”

He contends that “a more substantial reset of the product portfolio, development base and infrastructure are necessary to significantly improve the return profile over the longer term.” Meanwhile, to get to the $1 a share target, he thinks the company will further cut costs as it heads into “another holiday season characterized by out-sized success for his sequel product and little for new IP.”

The Goldman analyst also says he has lowered his “M&A probability” forecast to 15% from 20%, given announced deals from potential buyers - a reference to Disney buying Marvel - and minimal moves by the company to highlight value - which is to say, they aren’t buyback stock or cutting enough costs.

Wienkes also cuts his rating on the overall video game sector to Neutral from Attractive, citing”a more challenging industry revenue outlook.”
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