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It's Friday, and that means time for the Friday Video Game Update. This week I'll respond to a reader's question.
GAMESTOP: A GOOD BUY INTO EARNINGS?
A reader left the following comment:
I can't help but think that with ATVI earnings, ERTS earnings (past & future revenue good, profit not), and Ubisoft's (UBI.PA) beat & raise that 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, 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 been beat estimates the past 4 quarters, that could set the stock up for a fall.
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 the 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 the game publishers' earnings--ATVI, Ubisoft, and Nintendo were fine, but 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.
As for me, 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 yesterday 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.
Thanks for the comment and look for another Video Game Update next Friday! If you missed last week's call to buy Activision, check it out.
Disclosure: Long GME, ATVI, NTDOY
Simultaneously posted on my personal site, www.thestocksurfer.blogspot.com
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