Electronic Arts (NASDAQ:ERTS) reports second-quarter earnings Thursday night. The first quarter was a disappointment, but EA has been cooking up some fresh content lately. The stock now looks like a solid value play.

What Fools say:
Here's how EA's Motley Fool CAPS rating stacks up against some of its peers and competitors:

 

Market Cap (millions)

Trailing P/E Ratio

CAPS Rating
(5 max)

Activision Blizzard (NASDAQ:ATVI)

$15,600

89.1

*****

Electronic Arts

$8,500

N/A

****

Konami (NYSE:KNM)

$2,400

12.8

***

Take-Two Interactive Software (NASDAQ:TTWO)

$880

8.1

****

THQ (NASDAQ:THQI)

$500

N/A

**

Data taken from Motley Fool CAPS on 10/29/2008.

CAPS All-Star ikkyu2, who owns the highest score ever amassed on an EA rating, is critical. "Great company, great products, questionable management, lousy margins, poor profitability, terrible valuation. Thumbs down."

But fellow All-Star DemonDoug disagrees. "Hollywood in the 1930s was booming. Video games today are what movies were in the 1930s. Electronic Arts is the No. 2 independent videogame company (No. 1 is ATVI), and with stellar perennial winners," it should keep making money.

What management does:
EA has not made a quarterly profit since Christmas 2006. However, given the split between crummy net income and jumpy but fairly decent cash flows, that might simply be smart accounting since the tax man cares only about the income statement. Also, don't forget that the sales trend is picking up steam.

Margins

3/2007

6/2007

9/2007

12/2007

3/2008

6/2008

Gross

60.8%

60.6%

56.8%

49.9%

50.8%

52.5%

Operating

1.8%

(0.4%)

(10.2%)

(13.7%)

(6.7%)

(3.4%)

Net

2.5%

0.8%

(6.6%)

(12.3%)

(12.4%)

(10.2%)

FCF/Revenue

7.1%

3.0%

0.5%

4.6%

6.9%

3.4%

Growth (YOY)

3/2007

6/2007

9/2007

12/2007

3/2008

6/2008

Revenue

4.7%

2.5%

(5.7%)

1.0%

18.6%

32.6%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
DemonDoug has a good point: EA owns some of the biggest franchises in video game history. Sports games like Madden NFL and Tiger Woods PGA have no serious competition. The Sims, with its many sequels and expansions, is the best-selling game series ever in the world of PC games. Up-and-comers like Rock Band and Spore seem destined to sprout profitable sequels for years to come, too. The occasional DRM-related backlash may have created a piracy beast, but it sure didn't kill official sales. Even the Warhammer franchise is off to a good start.

And yet EA is playing second fiddle to Activision in the long run, and to the Nintendo (OTC: NTDOY.PK) juggernaut in October. It's dangerous to draw long-term conclusions from the seasonally weak summer quarters, but EA's stock price has been hit harder than most recently and the shares sure look cheap. In balance, this is a giant in the gaming industry that won't go away for a long time and will get in the occasional home run among its many three-and-outs. The unusual value-based opportunity seems to outweigh the minimal risks.

Take-Two Interactive Software is a Motley Fool Rule Breakers pick. Nintendo, Electronic Arts, and Activision Blizzard are Motley Fool Stock Advisor picks. Try any of our Foolish newsletters today, free for 30 days. Or just sign up for a free CAPS account to find out what all the cool Fools are saying about your favorite stocks.

Fool contributor Anders Bylund owns shares of Take-Two, but he holds no other position in any of the companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure is the Punxsutawney Phil of financial forecasting.

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