BofA Cuts GameStop To Neutral Following Q3 Results

• Shares of GameStop Corp GME have been treading an upward path in 2015 and are up 11 percent year-to-date.
• BofA Merrill Lynch’s Curtis Nagle downgraded the rating on the company to Neutral, while reducing the price objective from $56 to $42.
• Although GameStop’s stock is not expensive, there are no meaningful drivers to boost its valuation, Nagle stated.

Analyst Curtis Nagle pointed out that GameStop has several high growth assets that can help it offset the softness in the core segment. The investors are, however, expected to remain focused on new software growth.

GameStop reported 3Q earnings of $0.56, short of the BofA estimate of $0.62 due to lower comps and EBIT. The company’s comps for the quarter declined 1.1 percent and its EBIT margin was down 38bps to 4.58 percent.

The company maintained its FY15 operating EPS guidance of $3.66-$3.86, while forecasting full-year comps at +2-6 percent, as compared to the earlier guided +2-7 percent.

The EPS estimates for FY15, FY16 and FY17 have been reduced from $3.97 to $3.76, from $4.59 to $4.24 and from $5.09 to $4.76, respectively.

Nagle believes that investors will remain focused on new software growth at least until GameStop’s non-gaming businesses contribute more to the company’s earnings.

Gamers are buying fewer games due to a lower number of titles per year, the analyst mentioned, while adding, “…long-established AAA franchises (where GMEover indexes) are either plateauing or outright declining and new franchises are simply not large enough to offset the pressure.”