Gamestop: A Good Buy into Earnings?

A reader left the following comment:

I can't help but think that with Activision (ATVI) earnings, Electronic Arts (ERTS) earnings (past & future revenue good, profit not), and Ubisoft's (UBSFY.PK) beat & raise that Gamestop (GME) is positioned well to report good earnings and guide in-line. Especially with what they offer the customer in the current economy, trade-in values as well as less expensive used games. Do you own or watch GME?

I do own a small position in Gamestop, and have been wondering what to do with it before they report earnings on November 20th. Like most stocks, GME has suffered this year. A troubling sign is that GME has underperformed the retail sector (as represented by the Retail Holders ETF (RTH), but RTH is 20% Wal-Mart (WMT), so I wouldn't worry about that so much. (wow, that's an ugly decline!)

More troubling is that GME has recently underperformed a competitor like Best Buy (BBY), despite (I would argue) better fundamentals, such as stronger revenue growth and lower debt. An especially good fundamental sign to me is that Gamestop was able to buy a French game retailer, Micromania, showing off a strong cash position and a strategy for future growth. Part of the underperformance in the stock might be due to the fact that GME has outperformed for so long and it had to do some catching up on the downside (click here for a 5-year chart if you're interested). Here's the competitor snapshot from Yahoo!

The P/E ratio, PEG ratio, and Price to Sales ratio (P/S) all look decent to me, but the problem recently has been that analyst earnings estimates are still too high across the board. Whether this is true for GME remains to be seen. Forbes points out that although GME has beaten estimates the past 4 quarters, that could set the stock up for a fall.

From Forbes:

Heading into the earnings report, Wall Street is extremely optimistic when it comes to the retailer. Zacks reports that all 12 of the analysts following the firm rate it a "buy" or better, leaving ample room for downgrades should the company post less than stellar results.

I personally think that earnings will be fine, and downgrades don't worry me so much because the stock has been sold off aggressively already (-60% this year). I'm not sure much can be gleaned from other game publishers' earnings--ATVI, Ubisoft, and Nintendo (NTDOY.PK) were fine, but THQ (THQI) and ERTS were not good at all. It's the outlook that will really matter. If guidance is above estimates, the stock could see a pop, but if guidance is cautious, the response will be anyone's guess. Everyone expects a Grinch-like recession for the holidays, so we need to keep in mind that most retailers are being shunned by the Street.

I think GME is a good value (depending on your time horizon) in the low to mid 20s. But then again, I thought that in the low to mid 30s! GME made a new 52-week low just on Friday at 23.53. Going forward I'll be looking at how GME (and the overall market) acts leading up to the report. A big run up would beg traders to "sell the news," while a further sell off would set the stage for a rally. It's a tough call, which may argue for staying on the sidelines. I'll probably keep my small position and only trade around it when the risk/reward is particularly appetizing. For now, that means buying for a trade near 24 and selling near 30.

Comments

[Did U Think...:]

Lemesee. You want to talk about spending money on shares of a RETAILER of GAMES? In a depression? You are just gambling. Roll the dice, your odds will be better. Gaming is a mania that is now going to peter out as people get their heads out of the clouds and back down to basics. Like economical food, clothing and shelter.

2008 Nov 10 12:08 AM

[get a grip:]

You are obviously an investor that does not have a child, in America today (no less).
The fundamentals for the U.S consumer? Based on 2008, unlike 1978? Yes,... food, clothing, shelter, and "don't ever deny your child of anything" (even before the parents have food, clothing, and shelter).
Wake up, or miss the move.

2008 Nov 10 12:11 PM

[The Stock S...:]

Some would say the current environment favors games because people are more likely to stay home ("staycation" instead of vacation) and enjoy low cost entertainment. Go to Disneyland or buy the kid a video game?

The Wii is still hard to find and all my nieces and nephews have gaming systems. There might be reasons not to buy Gamestop (the fact that it's a bear market is my favorite one) but a nationwide shift to spending only on "food, clothing, and shelter" is not likely one of them.

2008 Nov 10 03:27 PM

[WhynoT:]

Everyone missed the point even the original editor. Check NPD's recent Q3 video game sales report. Sales increased in the 3Q for video games as a whole... INCREASED. Although it was a measly 1% the fact that sales increased over the previous quarter is more than a little substantial, more so when you consider the small offering of games during said quarter.

Video games are not for kids!! Again reference the last video game sector NPD study showing the average gamer is 33 years old. GME's used game model and dominant position make this a sure fire winner. My only concern is guidance for which GME historically underguides so as to beat... hopefully management has learned their lesson and wont set the bar too low.

If you're looking for a recent non trailing indicator the latest big video game release sold 2.1 million copies it's first day of release (gears of war 2).

Most probable scenario, GME meets expectations and guides in-line with estimates, where the stock goes from there is anyones guess.

2008 Nov 10 07:08 PM