3 Stocks That May Snatch Up Gamestop

by Jeff Reeves | March 23, 2010 2:13 am

Gamestop (GME[1]) is Wall Street’s favorite dog to kick around. Shares are down -20% from the March lows of 2009 despite a red-hot rally of about 70% in the broader market. That makes it one of the 10 worst performers in the last year[2].

The reasons are crystal clear: As consumer spending dried up, all but the hard-core gamers cut back on spending. And despite a bit of strength around the holiday season, video game sales have done nothing but drop. The details from February’s video game sales report[3] a few weeks back showed more of the same, and GME continues to pay the price.

But is the brutal fall of GME entirely fair? Some companies say the answer is no, and they are looking to game Gamestop’s decline with a bargain basement buyout.

A close look at the GME’s balance sheet explains the attraction. Shares are now trading at a very affordable P/E of around 8 and the company has topped Wall Street forecasts in three out of the four last quarters. To top it off, it recently forecast a year-over-year increase of 7% to 12% when Q1 earnings are released. Though consumer spending is indeed weak and unemployment remains a problem, nobody expects the trend continues to continue forever.

In fact, after its most recent earnings showed strength, GME would be highly unlikely to accept a current market buyout offer and would likely demand a significant premium above shares. But that may just be a bargaining chip, and a crafty buyer could certainly get a good deal on Gamestop if they wanted it right now.

The only question is whether it’s a good time to buy now before the rebound, or if more troubles ahead make it worthwhile to wait GME out.

So who are these potential suitors for Gamestop? Let’s take a look:

Potential Byer #1: Best Buy (BBY[5])

Retail rival Best Buy (BBY[5]) is a good buyout candidate because of its insatiable appetite for market share. When Circuit City went under, BBY was there to pick up the pieces even when consumers were becoming tight-fisted. The store said in its Q4 report that it added a whopping 127 stores in the last 12 months. That’s hardly hunkering down for a recession – and such growth plans would mean a Gamestop buyout is not out of the question.

Potential buyer #2: Blockbuster (BBI[6])

I know, it’s hard to be a buyer when you can barely keep the lights on and the CEO has admitted Chapter 11 is a possibility[7]. But despite the fact that Netflix (NFLX[8]) and video on demand from cable providers like DirecTV (DTV[9]) and Comcast (CMCSA[10]) have brutalized Blockbuster, don’t rule out a buyout just because Blockbuster is in the red. Execs know that the status quo isn’t working, and a merger with ailing Gamestop could keep BBI afloat … as long as it can scrape together the cash to make the deal.

Potential buyer #3: Walmart (WMT[11])

Gamestop hates Walmart (WMT[11]) with a passion, particularly after the big box retailer slashed game prices over the holidays in an effort to spur traffic and unload some game inventory. WMT has been low-balling Gamestop for a while, but Gamestop has managed to retain a following because of its enormous distribution network and trademark midnight release parties for highly anticipated games. With a 24 hour operation like Walmart that already has a blackbelt in distribution, GME would be a great fit to help the anything retailer continue to fend off electronics stores. What’s more, WMT doesn’t mess around with used titles right now, but a Gamestop buyout could help it get in on the lucrative preowned video game market.

For the record, don’t write off a darkhorse private capital firm in this race or even an international company that investors haven’t heard of. Almost a third of GME stores are outside the U.S., so this global reach could be attractive to global buyers.

A buyout isn’t a sure thing, but if it does happen it should probably happen sooner rather than later. Short interest represents about 15% of outstanding shares and the bar is set awfully low for GME after all the negativity on Wall Street. That means all Gamestop has to do is maintain its present course and prove the naysayers wrong and shares will gap up as the contrarians cover their position.

Then again, those bears could be proven right, and short-sellers will feast on Gamestop’s remains like Uroboros from Resident Evil 5.

Tell us what you think here.[12]

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Endnotes:
  1. GME: http://studio-5.financialcontent.com/investplace/quote?Symbol=GME
  2. the 10 worst performers in the last year: http://investorplace.com/experts/jeff_reeves/worst-stocks-dnb-apol-pwr-hrb-mon-pbct-df-gme-pcs.html
  3. The details from February’s video game sales report: http://investorplace.com/experts/jeff_reeves/worst-stocks-dnb-apol-pwr-hrb-mon-pbct-df-gme-pcs.html
  4. Nintendo: Coming to a school near you?: http://investorplace.com/experts/jeff_reeves/nintendo-ntdoy-schools-video-game-stocks-lf-leapfrog-sony-sne-microsoft-msft.html?cp=msn&cc=synd&cs=investorplace
  5. BBY: http://studio-5.financialcontent.com/investplace/quote?Symbol=BBY
  6. BBI: http://studio-5.financialcontent.com/investplace/quote?Symbol=BBI
  7. the CEO has admitted Chapter 11 is a possibility: http://investorplace.com/experts/paul_ausick/articles/blockbuster-bbi-bankrupt-nflx-cmcsa-twx-wmt-aapl.html
  8. NFLX: http://studio-5.financialcontent.com/investplace/quote?Symbol=NFLX
  9. DTV: http://studio-5.financialcontent.com/investplace/quote?Symbol=DTV
  10. CMCSA: http://studio-5.financialcontent.com/investplace/quote?Symbol=CMCSA
  11. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT
  12. Tell us what you think here.: mailto:editor@investorplace.com
  13. February Video Game Sales Slump: http://investorplace.com/experts/jeff_reeves/march-video-game-sales-slump-gme-msft-sny-ntdoy-atvi-ttwo-erts.html
  14. Nintendo Gadget Game Over for iPad: http://investorplace.com/experts/jeff_reeves/nintendo-ntody-apple-aapl-ipad-dsi-video-games.html
  15. Sony SNE Losing Its Grip on Video Games: http://investorplace.com/experts/jeff_reeves/sony-sne-video-game-stocks-playstation-psp-sales.html
  16. Get your FREE copy of this report here! : http://investorplace.com/order/?sid=YE3158

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