EA upgrade nets sleepy reaction on Wall Street

Yesterday, American Technologies Research analyst PJ McNealy joined a short list of financial experts who have recently adjusted their outlook for Electronic Arts. In a memo sent to investors, McNealy said he has moved the American Technologies needle from "hold" to "buy."

McNealy was not alone in shifting his outlook since the company released first-quarter earnings. Other analysts weighing in after EA's earnings call last week include Wedbush Morgan Securities analyst Michael Pachter, who last Wednesday lowered the firm's rating on EA from buy to hold--while raising his price target on the stock to $61 from $58.

One day later, Deutsche Bank Securities analysts reiterated their hold rating while reducing their estimates; their target price was raised, however, from $47 to $54. Brent Thill of Prudential Financial sticks with his "overweight" rating on Electronic Arts and sets a target price of $55 for the stock. While PiperJaffray's Tony Gikas maintained an "outperform" rating and reduced his estimates for the company--the Piper target price, now $64.

The reason for McNealy's revision? The bad times are behind EA, he says. "When we downgraded ERTS last November," he said today, "we cited a lack of near-term catalysts, no Halo 2 or GTA in ERTS' portfolio, struggling Madden sales in light of pricing competition, competition in sports in Europe, and the prospects for flat to declining growth."

What's also changed for McNealy is a new, more realistic attitude on the part of EA execs--as well as the prospects for some stellar games to impact the company's coffers. And where else are investors going to put their dollars if not the market's biggest publisher? "ERTS is the marquee name in the video game publisher space, and we believe that it has now set more realistic expectations about the video game console hardware transition challenges, " McNealy said.

As far as games go, McNealy pointed to two of the publisher's more dependable products. First up, one John Madden Football (aka Madden NFL 06), which McNealy says looks especially promising this year given there's no interference from Take-Two's 2K series of gridiron games. "Madden launches next week and we believe has a much less competitive environment given that the NFL 2K5 game last year from Take-Two Interactive Software is not available." Also, "NCAA Football sales [are] going well."

Even with as many unknowns as knowns, McNealy is calling EA a long-term win, for the time being at least. "To be clear, we believe that there will continue to be volatility in the video game sector this holiday with the Xbox 360 launch and in CY06 with the anticipated PS3 launch, but that volatility will not stop companies such as ERTS from growing."

Market reaction yesterday was subdued. EA shares traded up only a dime, closing at $59.47 on thin volume. However, after-hours trading pushed the stock up another $.18. Today, the stock is down almost a dollar.