Monday, September 29, 2008

Pachter: Recent Sell-Off of GameStop Shares 'Overdone'

Analyst Michael Pachter does not believe that decelerating comp growth indicates slowing earnings growth for GameStop.

by James Brightman on Monday, September 29, 2008

Pachter: Recent Sell-Off of GameStop Shares 'Overdone'

Countering investors' fears, in his latest industry note on leading video games retailer GameStop, Wedbush Morgan Securities analyst Michael Pachter has decided to raise his rating on the stock from "Hold" to "Buy" (although he lowered the price target to $43.50) and he stated that the recent sell-off of GameStop shares has been "overdone."

"The company reported same store sales of 29%, 46%, 17%, 27% and 20% over the last five quarters, and guided for comps of flat to +2% for the October 2008 quarter, due to extraordinary comparisons to October 2007 (46.3%), when the launch of Microsoft's Halo 3 game was accompanied by price cuts for both the PS3 and the Xbox 360, and a dramatic increase in overall hardware sales. This year, software sales growth is expected to be modestly higher, but hardware sales growth is expected to be roughly flat with a slight market share shift to mass merchants. Thus, we believe that GameStop's guidance is credible, although likely somewhat conservative," he said.

Pachter explained that "concerns about the economy have impacted GameStop shares, as investors appear to fear that consumers will 'roll over' and that video game sales will slow this holiday." He completely disagrees with these concerns, however. Although there may not be any one title on the scale of Halo 3, there is a strong pipeline of titles on its way in the next few months.

"...hardcore gamers (most of whom have already purchased a console) will line up at GameStop's doors in anticipation of key holiday releases like LittleBigPlanet, Animal Crossing, Gears of War 2, Call of Duty, Guitar Hero World Tour, Quantum of Solace, WWE and Rock Band 2. We think that GameStop remains the destination for new games, and believe that the company will attract trade-ins of used merchandise in order to provide its key constituents (13 – 18 year old boys with limited resources) the currency needed to purchase new games. These trade-ins will, in turn, position the company to deliver higher used game sales going forward, further widening the competitive advantage in software sales that GameStop enjoys over mass merchants," he said.

Ultimately, Pachter believes GameStop is "well positioned to continue its dramatic earnings growth for at least the next two years." via GameDaily

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