GameStop Corp (GME): The Stock To Study for September

GameStop Corp, a large retail chain of 4500 stores selling video game hardware and software, is this month’s Stock to Study in the September issue of NAIC’s Better Investing magazine. The Stock to Study is supposed to be a SSG Buy (or at least close) with a reward/risk or Upside/Downside ratio of at least 3.0 AND a minimum Total Return of 15% componded annually for the next 5 years.

- No way is this stock even close to being a reasoned SSG Buy!! To demonstrate, I can make it a SSG Buy only by using an unrealistically high EPS growth rate of 25% for the next 5 years (S&P is estimating 17.00% and Value Line 17.50%) AND an unrealistically high Hi PE of 27.2 (the highest ever, from 2002). More recently, its Hi PE was down to 22.6 in 2005 and to 20.1 in 2004.

These over-optimistic assumptions resulted in a reward/risk ratio of 3.1, barely satisfying the minimum 3.0 U/D criteria, but a Forecast High Price of $133.60 or some 16% higher than Value Line’s estimated $75-115 High Price in the next 3-5 years. Of course, I have no rational basis on which to project such high EPS growth and high PE in the next 5 years.

If I used more moderate assumptions, say S&P’s estimated 17% for future EPS growth and the average of 2004 and 2005 as the Forecast Hi and Lo PEs, I get a 2.2 reward/risk ratio, well below the minimum 3.0 U/D criteria that’s expected.

Moreover, if I was slightly more conservative and used the 5 year average Hi PE (instead of the last two year average), I get a stinky 1.3 reward/risk or U/D ratio. And, that’s with using 17% projected EPS growth….think how puny my SSG results would be if I was really conservative and estimated 15% EPS growth AND 19.1 forecast Hi PE (from Alt-M, usually the most conservative option in the SSG software).

What this means is that GME is overvalued, its current price is way too high to be a reasonable price. The SSG seeks to answer two basic questions: is the company under analysis a “good” growth company and is it selling at a “good” price. Here, GME fails the second test: it has been a high-growth company since it went public four years ago and its stock price has been bid up rapidly by many investors willing to pay for growth at any price. It also means that NAIC/BI did a poor job of screening and selecting a monthly Stock to Study that would satisfy the SSG Buy criteria.

- The Better Investing article mentioned that YahooFinance was estimating 17.00% EPS growth in the next 5 years. YahooFinance gets its EPS estimates from Thomson-First Call which also supplies other web sites. Unfortunately, when I checked these other web sites, I found a hodge podge of different EPS estimates for GME all of which are from Thomson-First Call:

….18.00% per year at StarmineInvestor.com for the next 5 years;

….18.20% per year at AOL.com for the next 5 years;

….17.00% per year at YahooFinance.com for the next 5 years.

That’s nuts….three different EPS estimates for the same company and all from the same data source makes me wary of relying on any of these estimates, for GME and for any other stock analysis in the future.

- What do you think….about GME and/or EPS estimates from Thomson-First Call?

armin