Electronic Arts Bonds Offer A Nice Yield

 In Bond Investing, Investing Idea

electronic_artsSubmitted by Holmes Osborne via Seeking Alpha

Electronic Arts (NASDAQ:EA) has a series of bonds that yield 3.279% and mature in March 1, 2021. The bonds are BBB- rated by S&P and the cusip is 285512ac3. The coupon is 3.7 and the price is 101.925. Comparable Treasuries yield 1.3%.

A billion dollars in fixed income was issued a few weeks ago to fund a share buyback and other initiatives. A second offering of $400 million is due in 2026. The offering amount that is the focus of this article is $600 million. Half will be used for the buyback and half for other initiatives. This series of bonds were offered at 99.85 and have already jumped over $20 in value per bond. Pretty impressive.

As of the latest 10-Q, the asset side of the balance sheet shows $2.263 billion in cash, $966 million in short term investments, and $621 million in accounts receivable. This is to $128 million in accounts payable, $333 million in a convertible offering, and the new $1 billion in long term debt. With numbers like these, no doubt the bonds are very safe. The challenging aspect with investing in corporate debt is that things can quickly change. Will EA want to purchase another software company?

Morningstar shows some pretty fat cash flow margins. In the past few years, free cash flow has been in the billion dollar range. Again, with these numbers, one is not worried about the debt.

Personally, I don’t like stock buybacks when markets are high. Were there any buybacks when the markets tanked in 08/09? I’d like to do the research.

This article on Seeking Alpha is bullish on the stock. It points to a drop in the stock price after lackluster earnings guidance, even though earnings were good. Here is an article from the Wall Street Journal discussing how the company’s digital content was not as good as expected.

According to the prospectus, there is some protection if there is a buyout. EA must pay holders 101 per bond if there is change of control. That protects holders against an LBO and additional debt. I didn’t notice anything else that was of concern in the prospectus.

These EA bonds are interesting. I’m not a software person so I’d have to consider things before I’d buy them. You have to view longer term bonds just like you would a stock. What are EA’s competitive advantages? There don’t seem to be barriers to entry in the software business. Still, the $2 billion in cash on the balance sheet gives one some level of confidence.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Sergey Sanko
Sergey had started an IncomeClub after years of being an investment advisor for high affluent investors and managing fixed income securities. He is the lead investment advisor representative and holds a Series 65 license. Sergey earned his Executive MBA degree from Antwerp Management School.
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