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GameStop Underperforms Market
Highlights include GameStop Corp. (GME - Analyst Report), Microsoft Corp. (MSFT - Analyst Report) and Sony Corp. (SNE - Analyst Report).
GameStop Shares Underperform Broader Market
The S&P 500 is up 33% from its March 9 low, but GameStop Corp. (GME - Analyst Report) shares are up just 14%. This weak relative performance is not justified. GME is trading at just 9 times consensus 2009 EPS estimates, it is one of the few retailers that will increase its sales this year, and the company's earnings are expected to grow about 23% this year and 12% in 2010.
It appears that market expects the video game industry, which has held up well during the economic downturn, to finally succumb to the macro environment. Recent data from the NPD Group support that view. Last week, the NPD Group reported that video game sales in April were soft. Sales of consoles Microsoft's (MSFT - Analyst Report) Xbox 360, Sony's (SNE - Analyst Report) PlayStation 3, and Nintendo's Wii declined 8% from April 2008, while sales of new video games fell 23%. For April, console sales totaled $392 million and new video game sales were $511 million.
Before hitting that "sell"-button on your GME shares, look at the April sales report in some context. The year-on-year sales drop was due to a weaker release schedule. In April 2008, Grand Theft Auto IV and Mario Kart were big hits, and there were no comparable releases in April 2009. This year, game developers and publishers are waiting until the second half 2009 to release their best games to take advantage of the holiday season. For video games (and most retailers), it is much smarter to disappoint in the spring than in the fall, when sales are much higher.
In addition, there are signs of pricing pressure in the industry. Prices on the most expensive games like Rock Band or Guitar Hero have experienced significant drops since last year and there are reports of other games selling at discounts to encourage shoppers to buy. Also, we would not be surprised to see console prices slashed in the next few months, but we would view that as a positive. Lower-priced consoles would be sure way to stir demand for video game sales.
We are maintaining our Buy rating on GameStop based on its attractive valuation, strong earnings growth, and our view that consumers will continue to spend on video games and reduce discretionary spending in other areas.
GameStop is scheduled to report first quarter results on May 21. Management's conference call should be informative, as GameStop usually does a pretty good job of assessing the current environment for video games. The Zacks consensus is calling for revenue of $1.981 billion and EPS of $0.44.
GameStop Shares Underperform Broader Market
The S&P 500 is up 33% from its March 9 low, but GameStop Corp. (GME - Analyst Report) shares are up just 14%. This weak relative performance is not justified. GME is trading at just 9 times consensus 2009 EPS estimates, it is one of the few retailers that will increase its sales this year, and the company's earnings are expected to grow about 23% this year and 12% in 2010.
It appears that market expects the video game industry, which has held up well during the economic downturn, to finally succumb to the macro environment. Recent data from the NPD Group support that view. Last week, the NPD Group reported that video game sales in April were soft. Sales of consoles Microsoft's (MSFT - Analyst Report) Xbox 360, Sony's (SNE - Analyst Report) PlayStation 3, and Nintendo's Wii declined 8% from April 2008, while sales of new video games fell 23%. For April, console sales totaled $392 million and new video game sales were $511 million.
Before hitting that "sell"-button on your GME shares, look at the April sales report in some context. The year-on-year sales drop was due to a weaker release schedule. In April 2008, Grand Theft Auto IV and Mario Kart were big hits, and there were no comparable releases in April 2009. This year, game developers and publishers are waiting until the second half 2009 to release their best games to take advantage of the holiday season. For video games (and most retailers), it is much smarter to disappoint in the spring than in the fall, when sales are much higher.
In addition, there are signs of pricing pressure in the industry. Prices on the most expensive games like Rock Band or Guitar Hero have experienced significant drops since last year and there are reports of other games selling at discounts to encourage shoppers to buy. Also, we would not be surprised to see console prices slashed in the next few months, but we would view that as a positive. Lower-priced consoles would be sure way to stir demand for video game sales.
We are maintaining our Buy rating on GameStop based on its attractive valuation, strong earnings growth, and our view that consumers will continue to spend on video games and reduce discretionary spending in other areas.
GameStop is scheduled to report first quarter results on May 21. Management's conference call should be informative, as GameStop usually does a pretty good job of assessing the current environment for video games. The Zacks consensus is calling for revenue of $1.981 billion and EPS of $0.44.