Are You Game For GameStop (GME)?
According to an article in Seeking Alpha, the valuation of GameStop (NYSE: GME) stock seems too good to be true. GameStop is the largest video game retail chain in the world, with 6,457 stores in 17 countries. GME sells video games, gaming hardware including the Xbox 360, PlayStation 3 and Nintendo’s (OTC: NTDOY.PK) Wii, and related accessories and peripherals. It also allows consumers to trade in their old video games and systems for newer products.
GME is trading at 8.6 times fiscal 2010 earnings. Given the consensus expectations of average annual earnings growth for the next five years at 12%, the company is trading at 7.5 times forward earnings. Moreover, Ford Equity Research has pointed out that GameStop’s normal P/E ratio is roughly 10.8, less than half of its own five-year average normal P/E. GameStop’s balance sheet is also healthy, since the company’s $447 million in debt at the end of Q3 amounts to just 8.8% of the total assets.
However, GME’s stock is not without risk considerations, such as deterioration in discretionary spending. This spending was partly the reason for the company slashing its fiscal 2009 earnings per share guidance to $2.23-$2.27, from the prior guidance of $2.45-$2.63. Moreover, the company faces high competition from Wal-Mart (NYSE: WMT), Best Buy (NYSE: BBY) and Amazon.com (NASDAQ: AMZN). These risks are, however, mitigated by GME’s extremely attractive risk/reward ratio.
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