I hate getting distracted by the thousands of other stocks out there. Because then things like GameStop Corp. (NYSE:GME) becoming an 8% yielding dividend stock — it may also be undervalued — happen.
GME stock has had a dizzying ride over the past 15 years, starting at $10 per share and reaching $62 at its peak in 2007, hitting a low of $16 in 2012, riding back up to $53 in 2013 and now sitting at $19 and falling. It has struggled because it has had to constantly morph to keep up with changes in gaming technology and platforms, and with competition. That has in turn required it to pivot and diversify into other offerings that have seen some limited success.
The gaming world is constantly in flux. That requires GME to hire employees who are able to be on the front lines of all the changes. Because GME stock derives a lot of revenues from its pre-owned game sales, employees must be experts in the areas of buy-sell-trade, pricing algorithms, inventory balancing, refurbishment capability, and consumer behavior.
GME Stock Backed By Diverse Operations
In my time away from analyzing GME stock, I’ve discovered things that I had no knowledge of whatsoever. I had no idea that GME has over 6,000 stores, only 4,000 of which are here in the U.S. Rather than run away from brick-and-mortar, they continue to open stores. The idea seems to be that gaming is experiential, unlike most other retail. Consumers want to try games and systems and speak to peers who are experts.
I had no idea that GameStop expanded away from gaming and into communications by purchasing Spring Mobile. Or that it owns the Simply Mac brand. Spring Mobile operates over 1,400 AT&T wireless stores and 69 Cricket branded pre-paid wireless stores. Obviously, these AT&T stores also sell DirectTV. Simply Mac has 50 stores that sell Apple products. Then GameStop purchased ThinkGeek.
At first, I was concerned that this move into telecom was a move of desperation. However, it looks to be a very profitable venture, at least as far as gross margins are concerned. While new game hardware pulled in $1.4 billion in fiscal year 2016, gross margins were only 11%, compared to about 24% for new software, and a fantastic 47% for used games. Accessories have a 32% margin, digital is fantastic at 80%, and technology brands (including Spring Mobile) is in the high 60% range.
Bottom Line on GME Stock
Because of the constant new cycles of new hardware and software, one can’t really measure GME stock in terms of year-over-year net earnings growth. So much depends on what games are most popular and when they come out. So one has to measure a business like this on cash flow, although the good news is GameStop stock is consistently profitable. Profit has been crimped a bit from year to year, but GameStop has $340 million in trailing 12 months (TTM) profit.
Free cash flow from FY14 through FY 16 and the TTM has been $320 million, $483 million, $395 million, and $537 million, respectively.
Of these amounts, dividends have been $150 million annually. That leaves plenty of free cash leftover.
So as it is, GME stock pays an 8.1% yield. That seems sustainable, and there’s possibly room for more.
So GME stock trades at 3.8x FCF. Considering that department stores like Macy’s Inc (NYSE:M) trade for 6.2x FCF, Liberty Interactive QVC Group (NASDAQ:QVCA) trades for 9x FCF, and The Liberty Sirius XM Group (NASDAQ:LSXMA) trades for 9x FCF, GME stock seems like a bargain, especially with the dividend.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. He is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. Meyers does not own any of the aforementioned stocks. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at [email protected].