Thursday, October 25, 2012

GameStop: Going The clear way of Blockbuster? Not Anytime Soon

GameStop (GME) is really a retailer which sells new and used video gaming, including console hardware and related accessories.

The business operates more(a) 6,500 suppliers, primarily across the US, Canada, Europe, and Australia. GameStop also owns several eCommerce sites in several countries using the GameStop, EB Games, and Micromania manufacturers. To continue its means of digital expansion, the company recently purchased popular gambling website as well as Impulse and Spawn Labs. These two will help the company's abilities to go in the market for distribution and streaming of popular games online. GameStop competes with other traditional box retailers together with eCommerce sites, including Wal-Mart (WMT), Amazon (AMZN), and greatest Buy (BBY).

For some time now, I have already been reading articles hearing how GameStop will probably be "going the clear way of Blockbuster" in a short time. If you most likely are not aware, Blockbuster became a movie rental retail chain any time a very extensive period of losing business to digital downloads and new competitors like Netflix (NFLX), filed for bankruptcy in September 2010.

Since the arena of gaming and entertainment has shifted more and more to digital mediums, investors are becoming concerned that GameStop's structure is dead and the company are not capable of adapt. Similar fears exists for other retailers of games and electronics - two examples might be best Buy and RadioShack (RSH).

In the following paragraphs, I will present my thesis that explain why I do believe GameStop shares are a good value today. The fears that investors have around the company are easily unwarranted. To produce my case, Let me first then compare how GameStop has done during the last number of years vs. the final numerous Blockbuster. I most certainly will then summarize the upcoming catalysts for the company and examine the latest valuation.

Comparison of Blockbuster and GameStop Financials - Clearly Not the Same Story

I think it's time useful to start looking at some financials which clearly show that GameStop is at greater shape than Blockbuster what food was in its final years.

This table shows some key metrics for Blockbuster in its final several years before bankruptcy.

Blockbuster 2005-2009

Operations Data


















Net gain






Long lasting Debt












Note: Data in table sourced from 2010 10-K of Blockbuster.

Over these 5 consecutive years, revenues decreased every year. Actually, revenues were down 27% above the 5 year period. Blockbuster lost cash with a bad profit in 4 out of your 5 years. Debt also remained high during the entire whole period. Stockholder equity just isn't shown from the table, but the debt/equity ratio was over one out of all of these years.

So without looking deeper into Blockbuster, it is rather clear through the numbers that this would have been a struggling company. There was warning signs within the financials.

This begs the question - if investors believe GameStop will "go the clear way of Blockbuster," you'd expect there are several similar warning signs inside financials - right?

In reality, one glance will show you that merely one other is valid. Allow me to share exactly the same financial metrics within the last several years of GameStop (data sourced from 2012 10-K):

GameStop 2007-2011

Operations Data












Gross Profit






Net Income






Long-term Debt












*Note: In 2012 the company initiated a healthy dividend, and focused on pay out many earnings to shareholders available as share buybacks and dividends. Stock currently yields 4.2%.

In the case of GameStop, revenues have continued to raise. As a whole they have got gone up 35% in 5 years. Profit has also increased overall. It really should be noted in 2011 the organization has a non-cash impairment charge, and that's why there were a drop in net in 2011. However, when compared with Blockbuster's last 5yrs, through the sure a much healthier company. Long-term debt been specifically payed off completely in 2011.

Risks to GameStop's Business structure

The financials surely look OK for GameStop, so there should be another thing taking place sometime soon prospects with the business which has scared investors away. Indeed, there are some risks to take into account. The obvious one is that video gamers will eradicate buying physical games, and can do their gaming online. As GameStop currently only gets lower than 13% of revenue from online sources, this may pose a huge problem to the company as long as they couldn't develop their digital share of the market quick enough.

I just read articles which explains rather effectively about these risks, understanding that really boils down to 2 main threats:

Gamers will convert to digital downloads, and stop gonna physical stores to acquire their video game titles.
Generation x of consoles released in 2012-2014 will drop backward compatibility, greatly hurting used game titles sales (used game sales constitute more(a) 40% of GameStop's profit).
I will not enter into detail here for the risks, because this is roofed inside referenced article and also many more on SA. In conclusion though, payday cash risks are overblown , nor pose an important threat from the coming number of years to GameStop. Threat #1 has some technological constraints around file compression, this means basically how the most popular larger games will not be downloadable within a reasonable timeframe even for the fastest broadband connections. It will take several hours to download, that may 't be practical for the majority of users.

When it comes to dropping of backwards compatibility threat, this can be unlikely to take place soon. The buyer sell for used games remains strong, as there are a great deal of evidence that this wouldn't be appreciated. Although it may well be more profitable for video game makers to do this temporarily, they must be mindful of what their potential customers are demanding, plus watch closely what their competitors are selling. The health risks of customer backlash are far too great here, therefore the likelihood of all 3 major console makers doing this is extremely small.

Summary of Upcoming Catalysts for GameStop

Given that we've established that GameStop is not in as often trouble as the pundits think, you'll want to understand that there are many potential positive catalysts happening within the coming year. This is the short list:

The 3 major video game console makers, Nintendo (NTDOY.PK) , Sony (SNE), and Microsoft (MSFT) are getting ready to release generation x of their products. The Nintendo dsi U is resulting out by the end of 2012, along with the other two are anticipated either late in 2013 maybe in 2014. This would improve hardware and new game sales for GameStop soon, and may also help to ensure that earnings and FCF numbers remain strong yearly 2-several years. There exists already evidence the Nintendo wii gaming console U gets stronger than expected demand.
Management has produced a powerful persistence for shareholders, by instituting a proper dividend (>4% yield), and also a massive share buyback program. This really shows their belief within the company. Continued lowering of outstanding share count is a positive for that stock price, and minimizes the down-side risk considerably.
Institutional ownership is 4%, based on Yahoo Finance. Small institutional ownership means that any positive surprises about the company might lead to a variety of them to acquire in, which supports the stock price further.
GameStop's compelling valuation

If you're still not convinced around the company, Among the best to go out of you with how compelling the actual valuation is. Have a look at these valuation ratios:













Clearly they are quite attractive numbers for a company that has had growing revenues, stable earnings, with out debt.

Conducting a straightforward DCF exercise, I buy an intrinsic importance of $33.97/share:

Discount Rate: 6%
EPS Growth over 5yrs: 3%
Growth after 5 years: 0%
Confidence in estimates: 75%
That has a current price of $22.86, there is certainly still a safety margin in excess of 30%. This DCF assumes very modest development in the coming years and cuts down on the resulting intrinsic value estimate a further 25% by building the confidence factor variable. By saying I am only 75% confident in my growth estimates, the DCF calculator assigns an intrinsic price of 0 to 25% in the business. Even though this is overly simplified, it offers the effect of being a very conservative approach to try to avoid over estimating the worth.

Finally, I find GameStop to become a compelling value stock. Clearly the organization is priced very cheaply through the market. You can also find positive catalysts, along with the company is far from favor on account of several risks which seem to be overblown.

I'd personally therefore ask readers - what is there to not love about GameStop? I welcome your comments below.

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