Gamestop (GME) reported fiscal first quarter results to the market today that were in line with estimates with EPS coming in at $.42.  Revenue was also reported in-line with expectations of $1.98 billion, which shows growth of 9.8% from a year ago.  However, GME stock is trading down nearly 17% on Thursday afternoon after the company lowered second quarter earnings guidance and comparable store sales.  At Ockham, we are always looking to find disproportionate responses to earnings releases because often value can be found in a stock that has just endured a major downtrend.  We believe this could be just that sort of opportunity for investors that have a long term time frame.

“Gamestop down 15%, they lowered their outlook, second quarter outlook. They cut it based on what they’re seeing but also beat so Gamestop doing really well with a couple big video games — people are buying video games they’re staying at home, need entertainment.” Fox Business Network 5/21/2009

Ok, so Gamestop reported same store sales were down 1.5%-2% in the recent quarter, and expects that important measure of retail to fall 8% to 11% in the following quarter.  So it  sounds like sales and earnings are going to struggle, why would we be considering an upgrade at this time?  First of all, the company is reaffirming expectations for the full year 2010 earnings, guidance calls for a range of $2.83 to $2.93 with the mid point of that range being slightly better than analysts estimates of $2.87.  Assuming that Gamestop can hit the $2.87 over the next three quarters, they are selling at only 7.6 times earnings or only 9 times fiscal 2009’s already reported EPS of $2.40.  That is a fairly cheap multiple for an established company, and an extremely cheap multiple for a retailer that is growing sales at 43% per annum in the last 5 years. Earnings growth has been equally impressive growing at a 35% clip in the last five years.  Furthermore, even though the growth rate may have slowed in the past year, it is growing none the less as earnings are expected to grow at a rate of 19% this year.

Additionally, the lower same store sales and earnings for the 2Q are being compared to the quarter a year ago that featured major game releases including the latest titles of Grand Theft Auto and Guitar Hero.  Those are two of the most successful games of all time, and the coming quarter simply does not have the blockbuster games that were released a year ago.  This is not necessarily great news for Gamestop but it shows that it is not an internal problem that is causing the second quarter slowdown.

Coming into the day, with Gamestop trading in the mid $20’s we had a Fairly Valued rating but the current price-to-cash flow and price-to-sales metrics were very near breaking through the low end of their historical ranges.  The stock trading down 16% on news that we find to be not all that distressing.  Game sales have been particularly recession resistant as evidenced by Gamestop’s growth.  The company has shown solid performance despite the cutbacks in consumer spending around the country.  So, we see this rapid price decline today as a possible entry point for the opportune investor who wants to hold for the next few months.  As far as specialty retailers, which is a scary segment of the market, this is one of the better values available based on current fundamentals.