Electronic Arts: Sales Growth? Game Over

Slumping sales prompted videogame publisher Electronic Arts (ERTS) to issue a profit warning late Tuesday, leading investors to frag the stock Wednesday.

The publisher of popular games such as "Madden NFL" and "The Sims" previously forecast net revenue of between $4.9 billion and $5.15 billion for the fiscal year, with operating earnings of $1 to $1.40 a share.

But after the market closed Tuesday EA said it wouldn't come close to meeting those projections and declined to offer a new outlook.

We're almost 11 weeks into the third quarter and it is now clear that we will be coming in with revenue significantly below our internal plan for the quarter, Chief Executive John Riccitiello said on a conference call. As a result, we will not be able to achieve our previously issued financial guidance for fiscal 2009."

Wedbush Morgan analyst Michael Pachter cut his rating on EA to Buy from Strong Buy following the news, and said shareholders were deeply disappointed in the company s inability to reboot sales.

Just when investors began to believe that things couldn t get worse, they did, and we believe that investors remain skeptical that management is on the right track, Pachter wrote Wednesday. "We think that investors have tired of [management's] promise of a turnaround without the commensurate commitment.

EA has many well established games, but new titles haven t made the same impact as the old standbys. Kaufman Brothers analyst Todd Mitchell wrote Wednesday that a big part of the company s problems stem from its failure to deliver hit games for the most popular hardware, notably Nintendo's Wii and DS systems.

Nintendo is killing the category again this season, Mitchell wrote. The Wii is outselling Microsoft (MSFT) Xbox 360 by a two-to-one ratio and Sony (SNE) PlayStation 3 by a three-to-one ratio, the analyst noted. Furthermore, Nintendo is capturing 60% to 65% of Wii software sales, Pachter wrote.

Bottom Line: Hold
Despite the dismal news the holiday shopping season should give EA enough of a sales bump to prompt some short-term volatility. Watch for it as a potential exit point.

American Express: Slammed by Citi Sell Call

Shares of American Express (AXP) sold off sharply Wednesday after two analysts dropped a Sell rating on the stock.

Citigroup stock analyst Donald Fandetti and bond analyst Ryan O'Connell on Tuesday initiated coverage on the New York credit card and financial services giant at Sell. The analysts' report warns that AmEx's rapid growth during the end of the credit bubble means it will fare worse than rivals Visa (V) or MasterCard (MA).

We expect credit to deteriorate at a faster rate than [AmEx's] peers due to more aggressive growth in '06-'07," the analysts wrote. "We are also concerned that the credit card [asset backed securities] new issue market has closed, taking away a cheap source of financing."

Fandetti and O'Connell also cautioned that although AmEx's conversion to a bank holding company gives it access to capital now, it "may need to seek longer-term funding solutions. AmEx converted to a bank holding company in November in order to tap federal funds under TARP, the government's Troubled Asset Relief Program.

On Monday, reports said AmEx would sell $5.25 billion worth of bonds guaranteed by the Federal Deposit Insurance Corporation. The company may well need it. The drop-off in consumer spending has reduced transaction volumes on all consumer credit cards.

Citi joins Macquarie Research in predicting trouble ahead for AmEx, a component of the Dow Jones Industrial Average. On Nov. 25, analyst John Williams cut his rating on the stock to Underperform. Williams has concern that AmEx might have to put unpaid receivables back on its balance sheet next year and said the deteriorating credit situation would likely have an impact on the company's business.

Bottom Line: Sell
It s tough to say investors should move in lockstep with analyst calls, but there s more than one observer who sees AmEx heading for a greater than normal share of trouble in already tough times.

Southwest Airlines: No LUV for Budget Flier

Shares of Southwest Airlines (LUV) for years the lone steady name in a sector beset by volatility continued their three-month plunge Wednesday, as investors remained concerned about its famed fuel-hedging strategy.

Airline analyst Roger King, who covers the company for CreditSights, says the extensive hedging strategy that kept Southwest s fuel costs essentially flat for the past eight years turned against it when oil plunged from a summer high of $147 a barrel to its current range of $44 to $45. When an airline hedges fuel, it locks in a certain price in advance, a strategy that worked well for Southwest when oil prices were skyrocketing. But the global commodity boom has collapsed dramatically over the last several months and money Southwest once saved is now money spent.

[Southwest is] now having to pay some counterparties [in their fuel hedging contracts], King says. Before, the company was getting up to $4 billion in counterparty deposits. Now they re having to pay out cash. It looks like some of those hedges are out of the money.

The Dallas airline also said it's trimming its flight schedule. Southwest will boost its flights to Denver, but eliminate less traveled routes to reflect a drop in passenger demand.

In today's environment, it is more important than ever to maximize our productivity with our aircraft," Chief Executive Gary Kelly said in a prepared statement. "Our optimization exercise is a case of eliminating unproductive flights and reallocating our aircraft to match supply with demand."

CreditSight's King says that although Southwest may suffer over the next 10 to 12 months, the drop in oil prices should benefit many other major carriers, notably Delta Airlines (DAL), which should become cash-flow positive as long as oil prices stay low, even as fewer people get on fewer flights. Demand could really drop a lot before it overcomes the positive impact of the [declining] price of oil, King says.

Bottom Line: Sell
The lack of clarity on the impact of Southwest s fuel strategy makes other names better bets if you feel the need to own stocks in this volatile sector.