GameStop (GME) reported fourth-quarter 2016 results on Friday (January year end), encouraging both bulls and bears. The stock will be volatile today.
After reading a variety of news stories that cherry-picked information from the earnings report, I decided that a factual presentation of GameStop’s recent corporate performance and expectations of coming sales and profits would be most beneficial to Smart Investing subscribers.
But before I go further, here’s my assessment: The company is expected to continue growing annual revenues and profits, the dividend is huge and I would buy this stock in a heartbeat, with expectations of making above-average capital gains this year.
GameStop is going through a multi-year phase of shifting its product mix in order to continue to grow and thrive. Because video game sales are declining, the company is purposely increasing its sales of digital content, mobile and consumer electronics, action figures and collectibles--all higher-margin businesses than video game sales. In keeping with that goal, the company purchased Geeknet in 2015 and entered into a publishing contract for a new video game--a role that it had not previously served.
Fourth quarter 2016 results:
- Fourth-quarter revenue rose 1.4% year-over-year to $3.53 billion (5% before foreign currency effects); analyst consensus estimate was $3.57 billion.
- Fourth-quarter same-store sales rose +3.1%.
- Fourth-quarter gross margins rose to 30% vs. 28% last year.
- Fourth-quarter EPS were $2.40, above the consensus estimate of $2.25 and above $2.23 last year.
Full-year 2016 results:
- Revenue rose to $9.36 billion, GameStop’s third straight year of annual revenue growth.
- Net income rose to $402.8 million, almost reaching its record net income of $406.8 million from 2011.
- The company increased its profit per store from $153K in 2015 to $176K in 2016.
First-quarter 2017 results are expected to decline year-over-year, due to fewer major video game releases. (There were several major game releases a year ago, in first quarter fiscal 2016.) This is a normal event for entertainment stocks, and is not considered to be “a problem” by analysts. However, you will frequently see this fact cited as justification for day traders to short the stock. As a result of the lack of game releases, first quarter revenue will fall 4%-7%.
Full-year fiscal 2017 and 2018 expectations:
- The company expects fiscal 2017 revenues to rise 0-3%, with a small increase in operating margins, and a 0-3% decrease in same-store sales. Second and third quarter revenues are expected to rise 1.5%.
- Within the product mix, video game sales are expected to decline 5%-10% in fiscal 2017.
- The company expects record fiscal 2017 net income of $415 million.
- “We note that Q1 revenues are expected to decline as a result of a tough comp from 3DS product sales last year, and the delay of Sony’s Uncharted PS4 game until May,” commented an R.W. Baird analyst in a March 25th Barron’s article.
- Analysts expect GameStop’s EPS to grow 26.1% in fiscal 2018.
Other important stock and company data:
- The dividend yield is huge: 4.9%. The most recent dividend increase took place in February 2016.
- GameStop is actively repurchasing stock. The company also repurchased 26% of outstanding shares from fiscal year-end 2011 through year-end 2015.
- The fiscal 2017 price/earnings ratio is very low: 7.6.
- The fiscal 2015 long-term debt-to-capitalization ratio was very low: 14%.
There are many Wall Street Buy ratings on GME, because professional investors recognize the value in the company. Even analysts who lower their price targets on the stock still expect the stock to rise! In recent days, I’ve seen a variety of published stock price targets ranging from 31 to 46.
- R.W. Baird’s Colin Sebastian reiterates an Outperform rating, and a $46 price target, urging investors to look past the forecast because in his view “the ‘bigger picture’ is ongoing revenue and profit diversification, even as GameStop protects or even increases market share within video games."--Barron’s, 03-25-16
As you can see, most of the long-term numbers range from good-to-fantastic, while first quarter results will be mildly disappointing but not problematic.
GME presents a tremendous total return opportunity for investors. Rating: Buy.