Can Electronic Arts (EA) Surprise on Q4 Earnings Estimates?

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Electronic Arts Inc. EA is set to report fourth-quarter fiscal 2015 results on May 5. In the previous quarter, the company reported a positive earnings surprise of 36.59%. On average, EA has delivered a positive earnings surprise of 331.09% in the last four quarters.

Growth Factors

EA reported strong growth in both earnings and revenues in the last quarter. The company has been the primary beneficiary of the ongoing shift from physical to digital. The digital business is expected to remain an important growth driver for the company and will offset weak growth in packaged goods.

Full-game downloads on PCs and consoles are seeing strong growth Moreover, its free-to-play game portfolio such as FIFA World and Battlefield Heroes continues to attract gamers at a significant rate, which is expected to drive strong advertising revenues over the long run.

However, higher spending on new consoles is expected to negatively impact software sales. Moreover, stiff competition from Activision ATVI and Glu Mobile GLUU are expected to keep margins under pressure.

For the fourth-quarter of fiscal 2015, EA expects to generate non-GAAP revenues of approximately $830 million. The company expects non-GAAP earnings of 22 cents per share in the quarter.

Earnings Whispers?

Our proven model does not conclusively show that EA is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESPand a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here as you will see below.

Zacks ESP: EA currently has an Earnings ESP of 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at 14 cents.

Zacks Rank: EA currently carries a Zacks Rank #3 (Hold). Though Zacks Rank #1, 2 or 3 increases the predictive power of ESP, the company’s ESP of 0.00% makes surprise prediction difficult.

We caution against stocks with Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Stock to Consider

You may consider the following stock as our model shows that it has the right combination of elements to post an earnings beat this quarter

Skullcandy, Inc. SKUL with an Earnings ESP of +7.69% and a Zacks Rank #1 (Strong Buy).

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