CEOs Are Buying These Stocks (Part II)

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In the previous article, I wrote about two companies whose stocks were bought by their own CEOs in February: First Commonwealth Financial and Computer Programs and Systems. In this article, I will cover two more companies with recent CEO purchases, namely Bally Technologies (NYSE: BYI) and Electronic Arts (NASDAQ: EA). Let’s dig deeper to see whether or not those two companies are worth buying at their current prices.

A Global Gaming Company With Double Digit ROIC

Bally Technologies, founded in 1932, is a gaming company that provides advanced technology-based gaming devices, systems, custom mobile applications and interactive applications. The majority of its revenue, $357.4 million, or 41%, was generated from gaming operations. Gaming equipment ranked second with $310.7 million in revenue, or 35% of the total revenue. In fiscal year 2012, its 10 biggest customers represented around 22% of total gaming device sales. For the last 5 years, Bally has managed to deliver double-digit returns on invested capital, in the range of 12.5% - 19%.  It has also generated consistent positive free cash flows. Over the last 12 months, the return on invested capital was 15.21% and the free cash flow was $122 million. However, Bally employed high leverage in its operation. As of December 2012, it had $196 million in total stockholders’ equity, $70 million in cash, and $560 million in debt.

On Feb. 3, Bally’s CEO Ramesh Srinivasan bought 25,000 shares at around $47.48 per share, with a total transaction value of nearly $2.1 million. However, the next day another insider, David Robbins, exercised 100,000 shares at $24.65 per share and sold 60,000 shares at $47.60 per share on the market. Bally is currently trading at $49 per share, with a total market cap of $2 billion. The market is valuing BYI at 8.23x EV/EBITDA. 

A Video Game Publisher With Huge Goodwill

Electronic Arts is a publisher and distributor of game software contents that could be played on video game consoles, personal computers, tablets, and mobile devices. The business is divided into two main segments: Products and Services. In 2012, the product revenue was $3.4 billion, while the service revenue was only $728 million. In the product segment, the majority of revenue, $2.67 billion, or 64.5% of the total revenue, was generated from publishing revenue. In the past 12 months, Electronic Arts earned $0.54 per share, generated $253 million in free cash flow, and delivered a 5.7% in return on invested capital. The company didn’t employ a lot of debt in its operation. As of December 2012, it had nearly $1.96 billion in total stockholders’ equity, $1.5 billion in cash, and nearly $650 million in debt. However, the amount of goodwill and intangible assets, $2 billion, was huge. 

Recently, Electronic Arts’ CEO John Riccitiello bought 31,300 shares at around $15.90 per share, with a total transaction value of nearly $500,000. Electronic Arts is trading at $17.40 per share, with a total market cap of $5.32 billion. The market is valuing Electronic Arts at 10.88x EV/EBITDA. Two of its peers, Activision Blizzard (NASDAQ: ATVI) and Nintendo (NASDAQOTH: NTDOY), are valued quite differently on the market. Among the three, Activision Blizzard is the biggest company with a $15.08 billion market cap, while Nintendo is the smallest company with only a $1.5 billion market cap. Nintendo has the most expensive valuation at 83.37x EV/EBITDA, whereas Activision Blizzard has the cheapest valuation at only 6.81x EV/EBITDA. However, Nintendo’s EV multiple is quite misleading, as its EV and EBITDA are negative. Nintendo’s EV is -$10.54 billion, while its EBITDA was -$126.43 million. Among the three, Activision Blizzard seems to be the most profitable company with a 30% operating margin, while the operating margins of Electronic Arts and Nintendo were 4% and -4%, respectively.

Foolish Bottom Line

Electronic Arts and Bally Technologies seem to be a decent bet with their CEO buys. With high return on invested capital, positive free cash flow, and a low EV multiple, Bally Technologies seem to be a better bet than Electronic Arts at its current price.  

 

 

 

 


hoangquocanh has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard. The Motley Fool owns shares of Activision Blizzard. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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