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Can GameStop Adapt to New Challenges?

March 27, 2014 | About:
Victor Selva

Victor Selva

9 followers

GameStop Corp. (GME) is a video game retailer. The company sells video game hardware and software, accessories, as well as personal computer (PC) entertainment software and other merchandise.

So let's take a look at this company and try to explain to investors the reasons this is an apparently appealing investment in the videogame industry which is highly competitive and shoppers have many alternatives to buy.

Larger Retailers

Big retailers such as Wal-Mart Stores Inc. (WMT), Target Corp (TGT) and Best Buy Co. Inc. (BBY) have also entered the video game market. Walmart said in its press release that it wants to offer the 110 million-plus gamers in the United States a new way to unlock value in their current purchases and to save on video game spending. The company will accept games for popular consoles like the Sony Corp's PlayStation3 and Microsoft Corp's Xbox 360, and customers can in return buy anything at Walmart and Sam's Club. So, to protect market share, GameStop will have to fight in a price war.

Expanding Business

The company operates electronic commerce web sites, an online video gaming Web site, the Spawn Labs, a digital PC game distribution platform, the online consumer electronics marketplace and mobile applications. As a matter of fact, it plans to expand its business into the mobile device category to provide the best video game content to its customers on any device. We think video game software and hardware sales driven by last year launches of the new PlayStation4 and Xbox One gaming consoles.

Analyst Recommendation

The firm is currently Zacks Rank # 4 – Sell, and it also has a longer-term recommendation of “Underperform.” For investors looking for a better Zacks Rank, Best Buy and GOME Electrical Appliances Holding Limited (HKSE:00493) could be an option.

P/E, Earnings and ROE

In terms of valuation, the stock sells at a trailing P/E of 11.3x, a discount compared to the mean industry. Earnings per share (EPS) increased by 111% in the most recent quarter compared to the same quarter a year ago, to $0.58 per share for the fourth quarter of 2013, beating the Zacks Consensus Estimate of $0.32. We include in the next graph the stock price because EPS often lead the stock price movement. As we can appreciate in the chart, the price performance makes the stock appealing with an upward trend over the last two years.

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Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has increased when compared to the same quarter one year prior. Let´s compare the current ratio with the peer group in the next table:

Ticker

Company Name

ROE (%)

GME

GameStop

-11.8

BBY

Best Buy Co Inc

-32.87

AAN

Aaron's, Inc.

10.59

CONN

Conn's, Inc.

11.09

HGG

HHGregg Incorporated

7.32

As we can see, the firm has a higher ROE than Best Buy, but far less than the ones from Aaron's Inc. (AAN), Conn's Inc. (CONN) and HHGregg Inc. (HGG).

Final Comment

The game industry is intensely competitive and subject to rapid changes in consumer preferences and new product introductions. GameStop will need to manage itself to adapt to the quickly evolving environment.

According to Yahoo! Finance, the estimated one-year target share price is $50.6, so if you buy shares at current market price ($37.79), your return from price appreciation would be 33.9%. In addition, you have to consider any cash flow received by the asset. So for holding the stock one year, you'll be paid a dividend of 27.5 cents per share each quarter, totalizing $1.1 at the end of the year. If we divide this number by current price per share, we obtain the dividend yield, which is the other component of the return on an investment for a stock, and in this case is 2.9%. So the total expected return for investing in GameStop is 36.8%.

Although Zacks Rank, in looking at the bigger picture, I would recommend investors to add GameStop to their long term portfolios. Hedge fund gurus have also been active in the company in fourth quarter 2013. Gurus like Paul Tudor Jones (Trades, Portfolio), Steven Cohen (Trades, Portfolio), Eric Mindich (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio) have taken long positions in it.

Disclosure: Victor Selva holds no position in any stocks mentioned.


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