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GameStop Valuation: An update After Q1 2011.

May 25, 2011 | About:
Update

· Total sales increased 9.5% to $2.28 billion from $2.08 billion.

· Total company comparable store sales were 5.3%, driven primarily by strong HD console sales, the Nintendo 3DS launch and a 9.5% growth of pre-owned products.

· Digital sales increased 53% over last year as each digital segment experienced strong growth.

· Net earnings increased 6.9% to $80.4 million, as compared to net earnings of $75.2 million

· Diluted earnings per share increased 16.7% to $0.56, as compared to $0.48.

Guidance

· For the second quarter of fiscal 2011, the company expects comparable store sales to range from -2.0% to flat. Diluted earnings per share are expected to range from $0.20 to $0.23 (compared to $0.26) As expected, the decline in year-over-year earnings stems primarily from the previously announced planned investments GameStop is making in its strategic initiatives, which will be approximately $0.04 per share in the second quarter.

· GameStop is reiterating its full year diluted earnings per share guidance range of $2.82 to $2.92, representing a 6.4% to 10.2% increase over fiscal 2010 ($2.64). Full year comparable store sales are still expected to range from 3.5% to 5.5%. Earnings guidance only includes the effect of the shares purchased thus far in fiscal 2011 from the $500 million share and debt repurchase plan authorized in February 2011.

Buyback: During the first quarter, GameStop purchased 5.92 million shares at an average price of $19.88, or $117.7 million worth of stock. Further share buybacks will depend on positive cash flow which is the case in quarter three and four. If not shares, the company could reduce some of the $250 LT Debt as it did in third quarter 2010.

Initiatives: Two betas planned. One for Spawn streaming games and one for Impulse (digital download platform). Zero square-foot growth planned in the U.S. Stores in Spain closed that were not performing. Company continues to operate smartly.

Valuation
P/E 10.0
P/E adjusted for Net Cash 9.6
EV / EBIT 5.5
EV/ EBITDA 4.4
EV / Sales 0.4


Conclusion: HOLD. The stock is still quite cheap at 10x trailing earnings of $2.74. If we take management guidance of $2.82 to $2.92 on face value, then at the current 10x earnings multiple, we are looking at a $28-$29 stock. Also, with share buybacks, GameStop could easily report $3 in EPS. I feel there could be further upside from the two most recent acquisitions that are being integrated. Also, Kongregate that was acquired earlier last year may provide some upside (no details provided).

Finally, we would expect some re-rating at some point as GameStop continues its execution and proves the shorts wrong. There is considerable short interest at 25% of float. I would expect a 12x P/E at the least giving us a $33-$36 stock. If the stock were to fall to 8x TTM P/E, $22-$23 or so, that would be a good place to add to the shares.

Disclaimer: I and account(s) that I manage, have a long position in shares of GameStop at the time of writing this article. My position may change at any time. This is not intended to be used as investment advice or a recommendation to buy /sell shares of any securities discussed in this article. Please do your own research or contact your financial advisor.

About the author:

Adib Motiwala
Adib Motiwala is a Portfolio Manager at Motiwala Capital LLC, an investment management firm that manages separate accounts for its clients.

Visit Adib Motiwala's Website


Rating: 4.8/5 (4 votes)

Comments

Adib Motiwala
Adib Motiwala - 3 years ago
Please see earlier article with original thesis from 2010.

http://www.gurufocus.com/news/134437/value-in-action--gamestop-corporation

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