Smart Investing


September 7, 2012


Does GameStop earn a high score?

I’ve been asked a few times about GameStop Corp., and whether or not to buy or sell. What do I think of this company?

A few years ago, I thought GameStop had great potential, but now I’m a little worried about what the future could hold.

In late 2007, GameStop saw its stock trade above $60 per share. By the end of 2009 the stock had fallen to current levels.

GameStop is a video game retailer, and sells new and used games, hardware and accessories along with personal computer entertainment. I’m not a big gamer, nor are any of my kids, but I wonder down the road how much of these games will be in the cloud, and whether the demand for the physical hardware will be nonexistent, which I think would hurt this company's resale business.

If I were to buy this company, I would be sure to talk to kids and gamers to get their take on where gaming is going. GameStop is located in Grapevine, Texas, and employs 17,000 full-time employees. The stock has a market cap of $2.6 billion and has a 52-week high/low of $26.66/$15.32. The company trades under the symbol GME.

Looking at the valuations, I see a nice PE of only 8.7 — well below the industry average of 268.

The forward PE looks good as well, coming in at 6.1, which reveals higher potential earnings per share going forward. Price to sales at first glance looks good at 0.29, however that is twice as high as the industry average of 0.14. Price-to-book value is also high at 3.32 which the industry is half that at 1.77. Price to cash flow for GameStop is 5.3 slightly higher than the industry average of 4.5.

Tthe company has a negative cash flow of $174 million, which is better than last year’s negative $226 million. In the last six months of last year the company did produce positive cash flow of more than $1 billion thanks to the holidays, obviously a big selling time for this company.

GameStop does have a nice yield on its dividend of 4.9 percent, using only 12 percent of earnings to pay that dividend. I checked the cash flow statement for the last 12 months and the current dividend seems to be the norm.

The questions with this company begin when one looks at the sales and earnings growth. Year-over-year sales have declined by 5.6 percent, while the industry experienced a 1.4 percent increase. Earnings per share over the same period also declined by 12.8 percent, which, while not good, is better than the industry decline of 95 percent.

Match up the strong balance sheet with the $1 billion cash flow, and an investor could make an argument for a buy on this stock despite the declining sales and earnings per share. The company carries no debt on its balance sheet, compared with an industry average of 20.4 percent. The industry also has a current ratio average of 1.4; GameStop is just shy of that number at 1.2.

Return on equity is 11.2 percent below my favored ROE of 15 percent, but above the industry average of 0.4 percent. Net profit margin comes in at 3.5 percent for the company, well above the industry average of 0.1 percent.

GameStop turned over its receivables 215 times over the last 12 months, compared to the industry turnover rate of 13.5 times. The inventory turnover rate over the last 12 months could have been better for GameStop at 6.3, roughly 17 percent under the industry average of 7.6 times.

The mean of 20 analysts is looking for earnings per share of $3.42 for the year ending January 2014. While that may sound like a long way off, it is only about 16 months away, which is not very long for an investor to wait. Over the last 90 days the mean estimate of the analyst has increased by 4 cents. While that's not a whole lot, it is better than decreasing by 4 cents. Over the next four years the analysts are looking for earnings growth of 7.9 percent, and the PEG ratio stands at 0.83.

The numbers on GameStop look pretty good overall, but I need to talk to some 12-year-old boys about gaming and see what they think.

Have a question or a company you'd like me to take a look at? Email me at

Wilsey is president of Wilsey Asset Management and can be heard every Saturday at 8 a.m. on KFMB AM760. Information is provided by Reuters.


September 7, 2012