Will GameStop Rebound?

With shares of GameStop Corp. (NYSE:GME) trading at around $23.19, is GME an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

GameStop is facing some challenging times. If you’re looking for good news, then you won’t find much. However, we’ll give it a shot. GameStop is seeing strong digital growth and momentum in mobile. Furthermore, the Forward P/E is 6.76 and there are more analysts on the Buy side than on the Sell side. If you want to hang your hat on those factors, then feel free, but it’s recommended that you take a look at the bad news as well. And prepare to read the following words often: down, decline, drop.

There were a few new games released heading into the holiday season, but there were no fresh releases. In other words, almost everything was a rerelease. It looks as though the gaming industry is going the way of Hollywood, or perhaps the iPad. The approach is to attempt to make sales by releasing new versions of old products, or games. This might work for a while, but it will eventually fail and anger consumers. Where are innovation, creativity, and risk-taking? Without them, the gaming industry is lost.

As you might have guessed, holiday sales for GameStop were weak. For the holiday season, sales were down 4.6 percent. Sales of new games dropped 5.1 percent. New hardware sales were down 2.7 percent. Same-store sales were down 4.4 percent. Internationally, same-store sales were down 6.4 percent. For Q4, GameStop expects same-store sales to decline 4.7 percent. Full-year same-store sales are expected to drop by 7.5 to 9 percent, which is higher than the original expectation of 6 to 9 percent.

Let’s take a look at some more important numbers. Hopefully, they offer a little more reason for optimism.

E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio for GameStop is perfect, as is the balance sheet. This is important for more than obvious reasons because it increases the appeal of the company to a potential acquirer.

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T = Technicals on the Stock Chart Are Mixed

GameStop has outperformed Best Buy Co. (NYSE:BBY) and RadioShack Corp. (NYSE:RSH) over the past three years. This isn’t saying much, but it’s better than the alternative. Best Buy and RadioShack aren’t direct competitors, but GameStop doesn’t have any real threats in its own industry. However, there are many threats in addition to Best Buy and GameStop, which include Target (NYSE:TGT), Wal-Mart (NYSE:WMT) and Amazon (NASDAQ:AMZN). Not a good sign!

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At $23.19, GameStop is trading below its 50-day and 100-day SMA, and above its 200-day SMA.     

50-Day SMA

25.33

100-Day SMA

23.26

200-Day SMA

21.33

E = Earnings Have Been Inconsistent

Looking at the past five years, every time it looked like GameStop would begin to sustain EPS momentum, there was a pause. In regards to revenue, GameStop has steadily improved. The rate of revenue growth might not be great, but not every company can increase revenue on an annual basis.

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When we look at last quarter’s results on a YoY basis, we see a moderate decrease in revenue, and a sharp decrease in EPS. Q4 is expected to offer an EPS rebound in the range of $2.07 to $2.27.

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T = Trends Do Not Support the Industry

The lack of new and exciting games isn’t the only problem for GameStop. A far greater threat is increased competition. Those names were mentioned earlier, and it would be difficult to imagine a scenario where GameStop could outmaneuver names like Target, Wal-Mart, and Amazon.

Conclusion

GameStop is facing some challenging times. In order to help deal with these challenges, GameStop is closing 200 stores. This isn’t a good sign, but at least it shows that the company is taking a realistic approach to the situation and adjusting accordingly.

As far as future stock performance, don’t get your hopes up. GameStop has traded sideways for the better part of five years. The 4 percent yield is attractive and the balance sheet is superb, but with no solidified catalyst for growth, GameStop is currently a neutral WAIT AND SEE.

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