Electronic Arts ($ERTS) has had a rough year.  The failed run at Take-Two Interactive ($TTWO) was a major distraction.  Last week $ERTS announced more poor financial results.  Analysts are openly questioning the company’s strategy while others are raising the question of $ERTS now being a takeover candidate themselves.  So how does the current share price look from an intrinsic value perspective?

Valuecruncher valuation model of $ERTS with interactive assumptions

Valuecruncher produces a valuation of US$25.48 for $ERTS This is a current valuation (an estimate of intrinsic value using a discounted cash flow model) not a target price. This valuation is 13.9% above the current share price of US$22.37.

Assumptions

• Revenue: Reuters aggregates 21analysts covering $ERTS and these analysts have mean estimates of 2009 and 2010 revenues of US$5.1 billion and US$5.8 billion respectively. For our analysis we have used US$5.0 billion in 2009, US$5.65 billion in 2010 and US$6.15 billion in 2011.
• Profitability: We have used an EBITDA margin of 11.5% in 2009 rising to 12.5% in 2011. Reuters has $ERTS‘s EBITD margin at  minus 6.9% last year and averaging 11.8% over the last five-years.
• Capital Expenditure: We have assumed capital expenditures of US$150 million per annum moving forward.
• Discount Rate: 11.0%.
• Terminal Growth Rate: 4.0%.

Our analysis incorporates the cash on the $ERTS balance sheet – Valuecruncher calculates a net debt number.

Play with our assumptions – what does your analysis say?

Disclosure: None