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GameStop: Value Or Value Trap

Summary

Markets reacted negatively when GameStop reported weak same-store sales.

After the drop, the company's stock valuations is even more compelling.

With rich dividend yield and cheap multiples, I determine if GameStop is a value or value trap.

GameStop's (NYSE:GME) earnings miss moved the stock into further value territory. After falling 10.6% on Friday, August 26, the valuation multiples for the electronics store will attract investors seeking value. Income investors may also circle the stock, as this author suggests. The dividend yield is rich, at 5.15 percent. Investors should ask if that payout is sustainable, especially when revenue is slumping. The more important question: is GameStop a value stock or a value trap?

GameStop reported an alarming drop in same-store sales. Total sales fell 7.4 percent in the second quarter, while same-store sales fell 10.6 percent. Considering GameStop acquired physical stores to grow revenue, the market anticipates (by selling off the stock last Friday) the company's business eroding further.

Source: GameStop

There is some hope. GameStop's Technology Brands grew sharply and contributed to $13.9 million in operating earnings (24% of overall earnings). Gross margins of 37.9 percent is an all-time high. The performance contrasts that of NPD's reported numbers. NPD reported hardware sales dropping 30 percent in July. The group also said...


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