GameStop Earnings: Deep Stock Analysis for Investors

The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.

GameStop’s (NYSE:GME) Q3 EPS exceeds guidance and estimates. Revenue was $1.77 billion, compared with our estimate of $1.74 billion, and consensus of $1.80 billion. EPS was $0.38, compared with our estimate of $0.34, consensus of $0.32, and guidance of $0.28 –0.36. The upside was from cost control and margin expansion as sales mix shifted towards the higher-margin Other category, which includes digital and mobile.

The company narrowed FY:12 guidance for comps to down 9.0-6.0% from down 10.0% – 2.0%, and maintained guidance for EPS  of $3.10-3.30.  In a challenging environment for video game sales, the company still expects to deliver EPS that is 8-5% above last year’s, likely because  of  share repurchases, expansion in digital and mobile (higher-margin), and expense management. Initial Q4 guidance is for comps of down 7.0-up 1.0%. The company narrowed Q4 EPS guidance to $2.07-2.27 from previous implied Q4 guidance of $2.04-2.32.

Q4 EPS guidance represents 20-31% growth above GameStop’s most profitable quarter ever, largely due to lower share count. Q4 includes the year’s most high-profile releases, including the next Assassin’s Creed, Call of Duty, and Halo. In addition, Nintendo (TYO:7974) will release the Wii U on Sunday. Q4 profitability will also benefit from repurchases and mix shift towards digital and mobile.

Returning capital to shareholders through a renewed share repurchase program and recently increased quarterly dividend. On Thursday, GameStop announced that its board approved a new $500 million share repurchase program to replace $242 million remaining on its existing authorization.  Additionally, the company will again pay a quarterly dividend of $0.25 (raised in Q2 from $0.15). We believe GameStop could support an annual dividend of $2/share.

We are increasing our FY:12 estimates for revenue to $8.92 billion from $8.89 billion and for comps to down 5.6% from down 6.1%, and increasing our EPS estimate to $3.25 from $3.20 to reflect the Q3 beat. We are maintaining our FY:13 estimate for revenue of $9.30 billion, adjusting our comps estimate slightly to up 4.5% from up 4.8%, and maintaining our EPS estimate of $3.50.

Maintaining our OUTPERFORM rating and our 12-month price target of $33, which reflects a multiple of 9x our FY:13 EPS estimate of $3.50. Our price target reflects GameStop’s strong revenue and earnings growth potential from continued market share gains, digital growth, and its repurchase program.

Michael Pachter is an analyst at Wedbush Securities. 

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