Gamestop: A Stock With More Potential Than You Think

Tickers in this article: GME MSFT TTWO

NICKS SOUSA, KAPITALL: 2013 could be a great year for Gamestop (GME) and its shareholders. Microsoft (MSFT) is planning to release its next generation console by year-end with Sony planning to release its new hardware before the holiday season as well. Grand Theft Auto V, a video game by Take-Two Interactive Software (TTWO), will be released in September. The GTA franchise has generated 125 million in sales to date and GTA V has the potential to be the biggest game launch of the year.

Gamestop has been taking abuse lately because its industry is shrinking as consumers shift to mobile games. However, the video-game retailer is making strategic moves into tablet apps, free online games, and other digital revenue streams that are allowing them to capitalize on this shift.

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Fourth-quarter profits for Gamestop beat estimates with net income rising to $261.1 from $174.7. EPS grew from $1.27 in Q4 2011 to $2.15 in Q4 2012 and EPS is estimated to be $3.17 in 2013 and $3.26 in 2014. Another highlight is the $1.10 dividend Gamestop offers, a type of return to shareholders that is hard to find on the street these days.

With a quality ratio of .55 and price-to-book value of 1.54, Gamestop meets the requirements for a bargain priced high quality stock, which means having a quality ratio (gross profit margin/total assets) greater than .33 and a price-to-book value less than 1.7.  Bargain price stocks that score high on quality have been show to outperform the overall market by 4% annually.

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Although Gamestop may not look great from an industry viewpoint, over the next year the retailer should put up some strong numbers because of next generation hardware sales and game sales for these new consoles. A consumer usually buys 3 to 5 games with the hardware, which will help boost Gamestop’s lagging new game sales numbers. There is also the promise of the retailer adjusting to the new gaming landscape by starting to focus on new digital revenue streams. Gamestop is also at a bargain and ranks high on the quality ratio, a good sign that it has the potential to outperform the market over the next year. Gamestop has a lot of potential good news coming down the pipe this year and is showing that it’s willing to adapt, so I recommend taking a closer look at this stock.