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Southwest Securities Downgrades Electronic Arts

Southwest Securities downgraded Electronic Arts (ERTS), Activision (ATVI), THQ (THQI), and Take-Two Interactive Software (TTWO) to neutral from strong buy.

Analyst Arvind Bhatia says he expects U.S. video game software industry will begin to experience: 1) slowing revenue growth; 2) higher R&D costs; 3) flat operating margins; 4) slowing EPS growth; and 5) multiple compression. He says this thesis assumes that the video game industry will be in transition next year based on belief Xbox 2 will be released in the fall of 2005 followed by PlayStation 3 in early to mid-2006 and Game Cube 2 in fall of 2006.

In anticipation, Bhatia recommends investors begin reducing exposure, especially if these stocks strengthen in the near term (due to strong holiday season).

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