GameStop Upped to Neutral

We recently upgraded our recommendation on GameStop Corporation (GME - Analyst Report) to Neutral from Underperform with a target price of $22.00. 

Being the global leader in retailing software, hardware, and game accessories for video game systems and personal computers, GameStop is better positioned than its competitors for the economic recovery. The stock is poised to surge once the economy rebounds and demand improves. 

GameStop recently reported fourth-quarter 2009 results that came a penny ahead of the Zacks Consensus Estimate, but fell 3.7% year-over-year to $1.29 per share. Revenue for the quarter rose marginally by 0.9% to $3,524 million.
 
Despite a fall in the bottom-line in the quarter, the Grapevine, Texas-based company expects earnings to rebound in fiscal 2010. GameStop now expects first-quarter 2010 earnings between 46 cents and 48 cents a share, reflecting a year-over-year increase of 7% to 12%, and fiscal 2010 earnings between $2.58 and $2.68, depicting a rise of 14% to 18%. 

For fiscal 2010, management expects a revenue growth of 4% to 6%. The video game retailer expects to achieve its sales and earnings growth target on the heels of operational efficiencies, higher market share and by adopting a buy-sell trade model.
 
The video game industry is highly competitive, and video game shoppers now have many buying alternatives for software, hardware, and game accessories for video game systems and personal computers. Retail heavyweights such as Wal-Mart Stores Inc. (WMT - Analyst Report) and Target Corporation (TGT - Analyst Report) have also entered the video game market. These larger retailers could create a dent in GameStop’s sales and margins. 

Moreover, increasing accessibility of consumers to video games and PC entertainment software over the Internet could hit the sales of packaged goods and used games, and impede future growth. 

Given the pros and cons, we prefer to be Neutral on GameStop at this juncture.

Read the full analyst report on GME

Read the full analyst report on WMT

Read the full analyst report on TGT