GameStop (GME) - Fragzors Teh Recession!

If you are looking for a good recession play right now, GameStop (GME) stock is just the stock for you. I know, I know, "Why on EARTH would I want to buy a specialty retailer, that sells freaking video games for gods sakes, at a time like this?" Or, at least that's what I'd think old stodgy banker types would ask. That's a valid question, if you have never been into a GameStop. If you have, you already know the answer. Or maybe you know it, but just haven't realized it yet. Here's some things to ponder about the economy, video games, and GameStop:

1. The economy is pretty crappy. Retail numbers are no bueno. People are looking to spend less money on everything right now, from food, to travel, to Christmas gifts. Perfect! Video games offer 100s of hours of entertainment for a front-end investment of $60. I spend that in 2 hours at the bar. So, if you do the math, video games can save you (me) about $500 a week. Buy, Buy, Buy!!

2. NPDs number for September came out last night. They were... ok. Hardware unit sales were flat, though down based on $s (due to price cuts). But flat vs. last September, when Halo 3 came out, is pretty darn good. Furthermore, the install base of current generation systems is now over 200 million (XBox 360, PS3, Wii, DS, PSP). That means you already have 200 million systems out there that need games. No need for big purchases here, just lots of small ones... And GameStop is best positioned to make out huge here... Why's that?

3. GameStop thrives on Used Game Sales. That's right. GameStop buys and sells used games (in case you didn't know that). They allow people to trade in old titles for new titles, in thousands of locations in strip malls across the universe. This allows even folks with $0 dollars to contribute to their bottom line. And even people who have lots of moolah, may be more inclined to spend $55 on Grand Theft Auto IV, instead of $60. Prudent, right? What a brilliant business model!! Oh, almost forgot, margins on used games accounted for half of GameStop's profits last quarter, on only a quarter of total sales!!

So, as the Economy sinks, GameStop becomes even more profitable. YAY!! Oh, and that was published in August. Just imagine how many used games they are selling now. Rake in the dollars.

Given this environment, I'd expect to see this stock to easily hit or beat earnings expectations for the year of $2.49, regardless of sales. Margins may double this quarter, and profits will be wonderful in a time like this. At a current stock value of around $30, that's a 12 P/E for the year. That valuation makes this a value stock, and not really a growth play.

Of course, when the street starts to realize that they are more likely to be on the high end of earnings estimates, resulting in earnings growth of 40% YOY, it is more likely you'll see a valuation of 15-18 applied to the stock. That results in a conservative valuation of around $40, and certainly higher if they beat earnings.

By the way, the Wall St. folks already know this, and are starting to buy the stock. It is already up 15% in the last couple days (it got hurt on retail numbers, which clearly don't apply to GameStop as they do other retailers). I'll leave you with a note from Credit Suisse to ponder:

"In the near term, given the effective freeze on spending over the last few weeks, we do not expect a retailer we cover, with the possible exception of GameStop, to achieve
current consensus estimates for 2008 or 2009."