UBS Upgrades EA, Hikes 'Star Wars' Estimates

In a report published Tuesday, UBS analyst Eric J. Sheridan upgraded the rating on The Electronic Arts Inc. EA from Neutral to Buy, while raising the price target from $65 to $80.

Electronic Arts has beaten both top- and bottom-line expectations for the past several quarters. Analyst Eric Sheridan pointed out that the upside has been driven by “strong title performance, higher gross margins from digital sales (led by growth in extra content, free-to-play and mobile gaming), and cost efficiencies.”

Sheridan expects the company’s shares to continue to outperform on account of:

1. “Expected FY16 title slate strength (Star Wars: Battlefront in particular)
2. Continued mix shift towards digital sales
3. Mobile gaming traction (now over 165mm mobile MAUs, contributing over 12% of trailing 12- month non-GAAP revenue)
4. Continued focus on cost discipline
5. Possibility for a recap using improved FCF to support greater debt to repurchase shares.”

The FY16 estimates for non-GAAP revenues, adjusted EBITDA and adjusted EPS have been raised from $4.48b to $4.63b, from $1.43b to $1.50b and from $2.84 to $3.01, respectively, to reflect “our expectation that Star Wars: Battlefront will sell 12-14mm units vs. management's guidance of 9-10mm units based on our UBS Evidence Lab survey of purchase intent, our hands-on experience, a strong reception at E3, and recent indicators of consumer interest,” UBS noted in the report.

Sheridan expects video game publishers to generate “more stable revenue growth, expanding margins, & higher FCF generation ahead,” which would enable them to “carry increased debt loads & justifying higher multiples.”