Is Electronic Arts (EA) Poised to Beat Earnings Estimates?

Zacks

Electronic Arts Inc. (EA) is set to report fourth-quarter 2014 results on May 6. Last quarter, EA posted a 0.9% positive surprise. The company has posted an average positive earnings surprise of 290.7% over the past four quarters. Year-to-date, EA’s share price has increased 24.8% compared with 2.7% in the S&P 500.

Let’s see how things are shaping up for the first quarter:

Growth Factors this Past Quarter

We believe that EA’s strong digital portfolio and continuing growth in the tablet and smartphone market are the key growth catalysts. The wide array of titles and massive fan following will better equip EA to gain traction in the digital gaming segment than most of its peers.

For the fourth quarter of fiscal 2014, EA expects to generate non-GAAP revenues of approximately $800.0 million, lower than the Zacks Consensus Estimate of $810.0 million.

Non-GAAP gross margin is expected to be 71.0% down from 74.0% reported in the year-ago quarter. Non-GAAP operating expense is expected to be $525.0 million. The company expects non-GAAP earnings to be 9 cents per share, much higher than the Zacks Consensus Estimate of 3 cents.

However, intensifying competition from Activision Blizzard (ATVI) and Take-Two Interactive (TTWO) remains a concern. Additionally, higher consumer spending on new consoles from Microsoft (MSFT) and Sony may cannibalize software sales in the near term. The delay in the launch of Titanfall for Xbox 360 will hurt results. We, therefore, remain cautious on EA’s fourth-quarter guidance.

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 ESP and a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here as you will see below.

Zacks ESP: Earnings ESP for EA stands at 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 3 cents.

Zacks Rank: EA’s Zacks Rank #3 (Hold) when combined with 0.00% ESP 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.

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