We are downgrading Electronic Arts (ERTS) to Underperform following dismal third-quarter results. Weakness in its EA business, poor holiday sales for the overall packaged goods sector in Europe and product mix shifts to lower-margin distribution business in North Americas hampered the company.
In addition, delays in launching new titles, lower restructuring benefits, weak traditional video game sales and the negative impact of foreign exchange led to disappointing guidance for the upcoming quarters. While the growth in the digital business and leaner cost structure may offset some of the decline in the packaged goods sales, we do not expect a turnaround in the near term.
Longer term, an increased focus on cost reduction, a strong balance sheet, a growing presence in digital distribution and the Playfish acquisition may add to growth. We lower our estimates for fiscal 2011 and set a price target of $14.Zacks Investment Research
