GameStop – Growth & Income

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A healthy dividend yield of 3.6% and a long-term earnings growth projection of 9.3% make GameStop Corporation (GME) an interesting option for investors seeking both growth and income. Shares of this Zacks #2 Rank (Buy) achieved a 52-week high on Dec 12 and have returned of 21.4% year to date.


Earnings estimates for this video game and entertainment software retailer have been moving upward since reporting fiscal third-quarter results last month, which included a positive earnings surprise of 18.8%. The company has beaten 6 times in the last 9 quarters.


GameStop Beats on EPS


On Nov 15, GameStop posted fiscal third-quarter earnings of 38 cents per share, beating the Zacks Consensus Estimate by nearly 19%. In the year-ago quarter, the company earned 39 cents.


Management reiterated its fiscal 2012 earnings outlook between $3.10 and $3.30 per share. For the fourth quarter, GameStop projected earnings of $2.07 to $2.27 per share.


The Grapevine Texas-based company posted total revenue of $1,772.8 million, down 8.9% from the year-ago quarter. The Zacks Consensus Estimate was at $1,791 million. Comparable-store sales dropped 8.3% due to soft hardware and software sales, and a lack of significant game title launches.


Earnings Estimates Climbing


The Zacks Consensus Estimate for fiscal 2012 rose 1.9% to $3.20 per share on the back of upward revisions from 12 of 15 estimates. The current estimate implies a year-over-year increase of 11.6%.


For fiscal 2013, the Zacks Consensus Estimate has advanced 1.2% to $3.45 on upward revisions from 11 of 17 estimates. The current estimate reflects year-over-year growth of 7.7%.


Dividend Payout


GameStop announced its first-ever quarterly dividend of 15 cents per share in February 2012. In August, it raised the quarterly dividend by 67% to 25 cents per share, representing an annual yield of 3.6%. The company’s commitment toward enhancing shareholder return reflects its free cash flow generating capability, sound liquidity position and well-defined future prospects.


Valuation Looks Reasonable


GameStop currently trades at a forward P/E of 8.69x, on par with the peer group average. However, on a price-to-book basis, shares trade at 1.64x, a substantial premium to the peer group average of 1.32x. Given the long-term earnings growth projection of 9.3%, the PEG ratio comes in at 0.94, marginally below the benchmark of 1 for a fairly priced stock. It has a trailing 12-month ROE of 13.9%, which is ahead of its peer group average of 11.4%.


The stock price remains below fiscal 2012 and 2013 earnings estimates, reflecting that it is still undervalued. Currently, the stock price is in the range of $25.00–$30.00, and has generated a healthy year-to-date return of 21.4%, significantly higher than the S&P 500’s return of 11.9%. Volume is strong, averaging roughly 3,096K daily.

GameStop is well positioned to take advantage of the growing market for video game products and PC entertainment software. The company continues to branch out and transform as a mixed retailer of physical and digital gaming and electronics products. The company’s venture in digital, iDevice and gaming tablet businesses will be accretive to its results.


Headquartered in Grapevine, Texas, GameStop, a Fortune 500 and an S&P 500 company, is the global leader in retailing software, hardware, and game accessories for video game systems and personal computers. The company is also the largest reseller of used video games as well as PC entertainment software. The company operates approximately 6,650 retail stores in 15 countries. GameStop also publishes a multi-platform video game magazine “Game Informer”. GameStop, which primarily competes against Amazon.com Inc. (AMZN</a.) and Best Buy Co., Inc. (BBY), currently has a market cap of $3.37 billion.


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