Gamestop Corporation

Reviewed 01/06/2014

Gamestop Corporation (NYSE: GME) – Hold based on a recent price of $49.24 and a fair value estimate of $51-$58.

The company is a multichannel video game retailer. It sells new and pre-owned video game hardware, physical and digital video game software, accessories, as well as PC entertainment software, new and pre-owned mobile and consumer electronics products.

The company posted y-o-y earnings growth of 8%, which was 5% lower than the prior year. Also, and certainly no cause to sound the alarm, the company posted free cash flow for fiscal 2013 of 4.21, a 9% y-o-y decline. The company again posted return on invested capital in excess of 100% for the fifth straight year that I have been following it, which is impressive to anyone, not just me.

One of the things I don’t like is the amount of money, about $3.24 a share, that the company spends on stock buybacks. To me this is a huge waste of capital. If management just can’t wait to reduce the company’s cash position, why not increase the dividend by $3 a share? I know that would work for me.

I bring this up not to criticise management, but more to highlight for investors that a huge amount of money is being spent that may be needed by the company going forward. Like it or not, and I am certainly not a pessimist, there are some pretty dark days ahead for the U.S. and the global economies, and the simplest way to keep the wolf away from the door is to horde cash.

Year-over-year earnings are pegged to grow at 9% and basis what I have seen for fiscal 2014, I don’t think the company is going to make that number. Regardless, the markets have already priced that growth rate into the stock which may not bode well for investors new to the stock.Wax

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