Strong Results/Guidance for EA, Though R&D Spending a Concern; Reiterate Strong Buy

5/14 - "Q4 results were above guidance and consensus estimates...Management guided to dramatic revenue growth and modest EPS growth in FY:09, expecting a surprising 30% increase in R&D spending. The company expects pro forma revenues of $5.0 – 5.3 billion and pro forma EPS of $1.30 – 1.70, compared to consensus estimates of $4.6 billion and $1.74, respectively...We are raising our pro forma revenue estimate to $5.25 billion from $4.6 billion, and are maintaining our pro forma EPS estimate of $1.75. We are modeling significantly higher R&D expense than we had previously."

"EA’s share price has lagged its peers over the last four years, with virtually no appreciation. We believe that this is attributable to investor concern about steady growth of R&D spending without corresponding revenue growth...We expect EA shares to appreciate when investors believe that the company can deliver operating leverage. In order for this to occur, we think that the company has to demonstrate discipline over the spending process, and show that its investment in R&D will yield a reasonable return."

"EA provided little color on its proposed acquisition offer for Take-Two for $25.74 per share. We note that EA’s offer expires on May 16, so we expect a resolution one way or another by the end of the week. We do not expect a competing offer from other parties, and think EA is serious about its intention to withdraw this offer if the parties remain too far apart."

"Maintaining STRONG BUY and our $66 price target on EA, which reflects a multiple of 25x adjusted FY:10 EPS of $2.26/share, plus an estimated $10/share in cash...We think that accretion from a combination with Take-Two will accelerate the path to achieving these profit goals, and expect EA to trade higher once a combination is completed."