GameStop Corp: Undervalued Based On Historical Earnings Growth

Before analyzing a company for investment, it’s important to have a perspective on how well the business has performed. Because at the end of the day, if you are an investor, you are buying the business. The FAST Graphs™ presented with this article will focus first on the business behind the stock. The orange line on the graph plots earnings per share since 2003. A quick glance vividly reveals the historical operating record of the company.

GameStop Corp (GME) is the world's largest multichannel video game retailer.

This article will reveal the business prospects of GameStop Corp through the lens of FAST Graphs – fundamentals analyzer software tool. Therefore, it is offered as the first step before a more comprehensive research effort. Our objective is to provide companies that have excellent historical records and appear reasonably priced based on past, present and future data and expectations.

A quick glance at the graph itself and the orange earnings justified valuation line will tell the readers volumes about how well the company has historically been managed and performed as an operating business. Simply put, the reader should ask whether this example is worthy of a greater investment of their time and effort based on the data as presented and organized. The FAST Graphs’ unique advantage is the graphical articulation of the price value proposition.

Earnings Determine Market Price: The following earnings and price correlated FAST Graphs™ clearly illustrates the importance of earnings. The Earnings Growth Rate Line or True Worth™ Line (orange line with white triangles) is correlated with the historical stock price line. On graph after graph the lines will move in tandem. If the stock price strays away from the earnings line (over or under), inevitably it will come back to earnings.

Earnings & Price Correlated Fundamentals-at-a-Glance

A quick glance at the historical earnings and price correlated FAST Graphs™ on GameStop Corp shows a picture of undervaluation based upon the historical earnings growth rate of 20.3% and a current P/E of 7.7. Analysts are forecasting the earnings growth to continue at about 9.2%, and when you look at the forecasting graph below, the stock appears undervalued (it’s outside of the value corridor of the five orange lines - based on future growth).

GameStop Corp: Historical Earnings, Price, Dividends and Normal P/E Since 2003


Performance Table GameStop Corp

The associated performance results with the earnings and price correlated graph, validates the principles regarding the two components of total return: capital appreciation and dividend income. Dividends are included in the total return calculation and are assumed paid, but not reinvested.

When presented separately like this, the additional rate of return a dividend paying stock produces for shareholders becomes undeniably evident. In addition to the 17.1% capital appreciation (green circle), long-term shareholders of GameStop Corp, assuming an initial investment of $1,000, would have received an additional $163.26 in dividends (blue highlighting) that increased their total return from 17.1% to 17.4% per annum versus 7.1% in the S&P 500.

The following graph plots the historical P/E ratio (the dark blue line) in conjunction with 10-year Treasury note interest. Notice that the current price earnings ratio on this quality company is as low as it has been since 2003.

A further indication of valuation can be seen by examining a company’s current P/S ratio relative to its historical P/S ratio. The current P/S ratio for GameStop Corp is .33 which is historically low.


Looking to the Future

Extensive research has provided a preponderance of conclusive evidence that future long-term returns are a function of two critical determinants:

1. The rate of change (growth rate) of the company’s earnings

2. The price or valuation you pay to buy those earnings

Forecasting future earnings growth, bought at sound valuations, is the key to safe, sound and profitable performance.

The Estimated Earnings and Return Calculator Tool is a simple yet powerful resource that empowers the user to calculate and run various investing scenarios that generate precise rate of return potentialities. Thinking the investment through to its logical conclusion is an important component towards making sound and prudent commonsense investing decisions.

The consensus of 20 leading analysts reporting to Capital IQ forecast GameStop Corp’s long-term earnings growth at 9.2% (orange circle). GameStop Corp has no long-term debt of capital (red circle). GameStop Corp is currently trading at a P/E of 7.7, which is below the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, based upon forecasted earnings growth of 9.2 %, GameStop Corp’s share price would $71.99 at the end of 2018 (brown circle on EYE Chart), which would represent a 27% annual rate of total return which includes dividends paid (yellow highlighting).


Earnings Yield Estimates

Discounted Future Cash Flows: All companies derive their value from the future cash flows (earnings) they are capable of generating for their stakeholders over time. Therefore, because Earnings Determine Market Price in the long run, we expect the future earnings of a company to justify the price we pay.

Since all investments potentially compete with all other investments, it is useful to compare investing in any prospective company to that of a comparable investment in low risk Treasury bonds. Comparing an investment in GameStop Corp to an equal investment in 10-year Treasury bonds illustrates that GameStop Corp’s expected earnings would be 10.4 (purple circle) times that of the 10-year T-bond interest (see EYE chart below). This is the essence of the importance of proper valuation as a critical investing component.


Summary & Conclusions

This report presented essential “fundamentals at a glance” illustrating the past and present valuation based on earnings achievements as reported. Future forecasts for earnings growth are based on the consensus of leading analysts. Although with just a quick glance you can know a lot about the company, it’s imperative that the reader conducts their own due diligence in order to validate whether the consensus estimates seem reasonable or not.

Disclosure: Long GME at the time of writing.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation. A comprehensive due diligence effort is recommended.