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GameStop Buy Rec Reiterated

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We think that GameStop Corp. ([url=]GME[/url]) has numerous competitive advantages that will enable the video game retailer to deliver strong growth for the next several years. Most investors underestimate the company’s used video game business, which produces strong sales with higher profit margins than new video game sales.

Unlike most other areas of retail, video game sales remain strong. According the NPD Group, total US video game sales were $1.69 billion, up 53 percent from June 2007. For the first six months of 2008, total video game sales were up 36 percent year-over-year and up 46 percent in the May/June period.

As a result, we expect another strong quarter from GameStop, and we are increasing our estimates. We are taking our 2008 EPS estimate from $2.40 to $2.42 and our 2009 EPS estimate from $2.98 to $3.01. We expect robust video game sales throughout 2009, and GameStop will continue to benefit from these strong industry trends.

GME shares are trading at 18.7x our 2008 EPS and 15.0x 2009 EPS estimate. We think GameStop’s industry-leading footprint, expertise in the used video game market, and the strength of the current video game cycle make GME shares a solid long-term holding. We also think the company’s robust growth justifies its premium multiple. We reiterate our Buy rating and our six-month target price of $60, which is 20x our 2009 EPS estimate.

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