CEO Resignation Will Not Derail Game Publisher’s Turnaround: Electronic Arts Inc. (EA), Activision Blizzard, Inc. (ATVI)

Competition is a Virtual Clone

Electronic Arts’ competitors are similar in almost all respects. Like Electronic Arts Inc. (NASDAQ:EA), Activision Blizzard, Inc. (NASDAQ:ATVI) was built upon the success hit franchises. The company’s World of Warcraft franchise has been enormously profitable for the company. On the console front, Call of Duty has proven to be a valuable asset for Activision Blizzard, Inc. (NASDAQ:ATVI).

Meanwhile, Take-Two Interactive Software, Inc. (NASDAQ:TTWO) depends on franchises like Grand Theft Auto and MLB 2k to lead the way to profitable growth. However, Take Two (NASDAQ:TTWO) is significantly smaller than EA and Activision, so it cannot leverage the same scale for higher margins. In addition, Take-Two sells its products at a much smaller gross margin than EA and Activision Blizzard, Inc. (NASDAQ:ATVI).

New CEO Could Lead Company to Higher Profitability

Despite a greater similarity to Activision in both size and price point, Electronic Arts Inc. (NASDAQ:EA)’ operating margins are closer to that of Take-Two than Activision. This is due to a still-bloated cost structure that Riccitiello’s best efforts could not subdue.

However, a new CEO could shake things up at the company and find a way to earn margins closer to that of Activision. If the new CEO can find a way to get EA to a 15% pre-tax margin, then the company would trade for just 9.5x pre-tax earnings based on TTM revenues. However, a 30% pre-tax margin — which matches Activision Blizzard, Inc. (NASDAQ:ATVI)’s margin — would make the stock a no-brainer.

It’s tough to handicap turnarounds, but investors who believe that a new CEO could take Electronic Arts from Take-Two profitability to Activision profitability should buy as much stock as they can get their hands on.

The article CEO Resignation Will Not Derail Game Publisher’s Turnaround originally appeared on Fool.com and is written by  Ted Cooper.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.