Retail Stocks

GameStop Corp Valuation – June 2018 $GME

Company Profile (excerpt from Reuters): GameStop Corp., incorporated on April 13, 2005, is an omnichannel video game retailer. The Company sells video game hardware, physical and digital video game software, video game accessories, as well as mobile and consumer electronics products and other merchandise through its GameStop, EB Games and Micromania stores. The Company operates its business in five segments, which consists of four Video Game Brands segments: United States, Canada, Australia and Europe, and Technology Brands segment. Each of the Video Game Brands segments consists primarily of retail operations, with all stores engaged in the sale of new and pre-owned video game systems, software and accessories, which it refers to as video game products. Its Video Game Brands stores sell various types of digital products, including downloadable content, network points cards, prepaid digital, prepaid subscription cards and digitally downloadable software, and also sell certain mobile and consumer electronics products and collectible products. Its Technology Brands segment includes its Spring Mobile and Simply Mac businesses.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of GME – June 2018

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $1,476,108,941 Fail
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.52 Fail
3. Earnings Stability Positive EPS for 10 years prior Fail
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end -9.99% Fail
6. Moderate PEmg Ratio PEmg < 20 5.91 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 0.68 Pass
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.52 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 1.29 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

 

Stage 2: Determination of Intrinsic Value

EPSmg $2.45
MG Growth Estimate 3.16%
MG Value $36.34
Opinion Undervalued
MG Grade A-
MG Value based on 3% Growth $35.56
MG Value based on 0% Growth $20.85
Market Implied Growth Rate -1.30%
Current Price $14.49
% of Intrinsic Value 39.87%

GameStop Corp. is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the small size, low current ratio, insufficient earnings stability or growth over the last ten years, and the poor dividend history. The Enterprising Investor is only concerned with the level of debt relative to the net current assets. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $2.03 in 2015 to an estimated $2.45 for 2019. This level of demonstrated earnings growth outpaces the market’s implied estimate of 1.3% annual earnings loss over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value above the price.

At the time of valuation, further research into GameStop Corp. revealed the company was trading below its Graham Number of $37.34. The company pays a dividend of $1.52 per share, for a yield of 10.5%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 5.91, which was below the industry average of 37.1, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-2.68.

GameStop Corp. fares extremely well in the ModernGraham grading system, scoring an A-.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$2.68
Graham Number $37.34
PEmg 5.91
Current Ratio 1.52
PB Ratio 0.68
Current Dividend $1.52
Dividend Yield 10.49%
Number of Consecutive Years of Dividend Growth 6

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Most Recent Balance Sheet Figures

Balance Sheet Information 4/1/2018
Total Current Assets $1,851,600,000
Total Current Liabilities $1,214,700,000
Long-Term Debt $818,600,000
Total Assets $4,308,400,000
Intangible Assets $1,659,200,000
Total Liabilities $2,124,900,000
Shares Outstanding (Diluted Average) 102,000,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $2.84
Jan2018 $0.34
Jan2017 $3.40
Jan2016 $3.78
Jan2015 $3.47
Jan2014 $2.99
Jan2013 -$2.13
Jan2012 $2.41
Jan2011 $2.65
Jan2010 $2.25
Jan2009 $2.38
Jan2008 $1.75
Jan2007 $1.00
Jan2006 $0.81
Jan2005 $0.53
Jan2004 $0.53
Jan2003 $0.44
Jan2002 $0.09
Jan2001 -$0.17
Jan2000 $0.10

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $2.45
Jan2018 $2.44
Jan2017 $3.09
Jan2016 $2.66
Jan2015 $2.03
Jan2014 $1.41
Jan2013 $0.92
Jan2012 $2.39
Jan2011 $2.26
Jan2010 $1.92
Jan2009 $1.60
Jan2008 $1.12
Jan2007 $0.75
Jan2006 $0.58
Jan2005 $0.40
Jan2004 $0.30
Jan2003 $0.15

Recommended Reading:

Other ModernGraham posts about the company

10 Stocks for Using A Benjamin Graham Value Investing Strategy – January 2017
GameStop Corp Valuation – July 2016 $GME
5 Speculative and Overvalued Companies to Avoid – June 2015
GameStop Corporation Annual Valuation – 2015 $GME
5 Speculative and Overvalued Companies to Avoid – November 2014

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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