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GameStop - Tutu Fishing With Karl

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June 13, 2010 – Comments (1) | RELATED TICKERS: GME

Back in February, we wrote an article about GameStop Corporation (NYSE: GME) titled GameStop - Tadpoles in the Stew. While the piece cited GameStop, it was more about the self-proclaimed Internet analysts, those with no credentials whatsoever, and how their cockroach mentality has the ability to hurt the working person investor.

An e-mail yesterday asked if we would follow up on the company itself as the author of the e-mail was considering a purchase of the stock. And that to us, ain't no game.

Basis

Financial information related to GameStop Corporation, contained in this report, is based on the company's most recent SEC Form 10-K filing, for year ending January 31, 2010, as filed with the Securities and Exchange Commission on March 30, 2010.

What They Do

GameStop Corporation, together with its predecessor companies, is the world’s largest retailer of video game products and PC entertainment software, selling new and used video game hardware, video game software and accessories, as well as PC entertainment software and related accessories and other merchandise.

As of January 30, 2010, the company operated 6,450 stores in the United States, Australia, Canada and Europe, primarily under the names GameStop and EB Games. The company also operates electronic commerce Web sites, including www.gamestop.com, and publishes Game Informer, the industry’s largest multi-platform video game magazine in the United States based on circulation, with approximately 4.0 million subscribers.

Short-Term Investment

The stock had a recent close of $21.66, with resistance at $22.75, a 5% increase from the recent close, and support at $17.12, a 21% decline from a recent close, it is hard to get to excited about a short-term investment in this stock.

The stock price is currently trending down, but reviewing some of the technical indicators, the case could be made that the downward trend is about to reverse.
Regardless, with the current (16%) spread between resistance and support, we simply don't think a short-term investment is warranted at this time.

Long-Term (5 Year Hold) Investment

The company's financials seem to change little year over year with Adjusted Operating Income continuing in the 8.5% range and Free Cash Flow in the $3.30 plus, per share range.
In addition, the spread between Days Receivables Outstanding and Days Payables Outstanding continues to be about 50 days, meaning the company is able to use suppliers money for free for that period of time.

However, without exception, the single most impressive thing about the company's performance, at least to us, is Return on Invested Capital, coming in for FY10 just above 218%, an 11% increase over FY09.

Valuations

Based on our review of the company's FY10 financial information, we believe a Reasonable Value Estimate for the stock, assuming a 5 year hold, is between $58 and $64 per share.
With the current uncertainty in the markets as well as the global economy, we think a reasonable entry target for the stock should be below $25.

In addition, for exactly the reasons we cite, namely the world economic uncertainty, we would include a Stop setting, adjusting it upward as the stock price increased.


Final Thoughts

The stock continues to hover in the $21-$23 range, where it has languished for some time. Regardless of the company's positive year over year financial results, we simply have no interest in owning this stock.

Certainly as the economy continues to struggle, we would not be at all surprised to see sales continue to increase, but we remind investors that an increase in sales does not always create an increase in earnings, and earnings are what increase shareholder value.

Wax

Worksheet

For the GameStop Corporation worksheet, please click here.

1 Comments – Post Your Own

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