According to a filing with the SEC, John Riccitiello, the CEO of Electronic Arts Inc. (NASDAQ:EA), purchased a little over 31,000 shares of the company’s stock on February 1st at an average price of $15.90 per share. Riccitiello now owns almost 450,000 shares directly, and his children’s trust owns a small number of shares as well. However, it’s generally not rational for insiders to buy more shares of their company’s stock; clearly the CEO of EA in earns an income dependent on the company’s prospects and so negative company-specific or industry-specific events could harm his income and his wealth. It is therefore rational for Riccitiello to diversify his investments unless he is very confident that the stock is undervalued. In general, this is why we believe that insider purchases tend to outperform the market (read more about studies in insider trading), though we’d note that EA’s stock has already risen significantly on the news.
This purchase came shortly after EA’s quarterly report, which provided relatively good news for a company in the struggling electronic games industry. While Electronic Arts Inc. did report net losses of $45 million for the third quarter of its fiscal year (which ended in December 2012), this was an improvement from a loss of $205 million a year earlier. The company has slashed cost of goods sold, marketing, and administrative costs alike as well as R&D, resulting in an improved bottom line despite a 13% decline in sales.
Electronic Arts Inc. and many of its peers have struggled with the shift to tablet and mobile gaming, but Wall Street analysts believe that this shift is slowing and that major market players finally have a handle on the new business in any case. Their estimates call for $1.14 in earnings per share in the forward fiscal year ending in March 2014; at current prices, that represents a forward P/E multiple of 15. We aren’t quite confident that EA has such strong prospects, but its cost-cutting strategy is certainly showing some progress and the CEO putting his own money into the stock is a positive sign.
Billionaire Kerr Neilson’s Platinum Asset Management reported a position of 5.2 million shares of EA in its portfolio at the end of September (see Neilson's stock picks). Glenview Capital, managed by Larry Robbins, increased its own stake by 21% during the third quarter of 2012 to a total of 9.1 million shares (find Glenview's favorite stocks); Robbins had previously worked for billionaire Leon Cooperman’s Omega Advisors.
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