GameStop Corp. (GME) delivered stellar results again. Its second quarter sales were $104 million above the consensus forecast, and EPS beat the consensus estimate by $0.04, which is about 19x our 2009 EPS estimate.
Looking ahead, the management's guidance for the second half of the year was in line with expectations. Unlike most other areas of retail, videogame sales remain strong. We believe this momentum will continue through next year. We are once again increasing our estimate. Our 2008 EPS estimate goes from $2.42 to $2.52 and our 2009 EPS estimate goes from $3.01 to $3.10. We maintain our Buy rating and our $60 target price.
We think the video game business is still in the early-to-middle stages of the current video game console cycle that includes the next-generation platforms Xbox 360, PlayStation 3, and Nintendo Wii. These next-generation systems require gamers to upgrade older systems in order to experience the more advanced video games.
The NPD Group projects total sales to reach $22 billion in 2008, which would be an increase of 22%. Longer-term, the video game industry should continue to take entertainment and advertising dollars away from movies and television. For their part, video game companies continue to produce entertaining, challenging and popular video games that gamers want to play. Most investors underestimate GameStop's used video game business, which produces strong sales with higher profit margins than new video game sales.
GME shares are trading at 17.3x our 2008 EPS and 14.0x 2009 EPS estimate. We think the company's robust growth justifies its premium multiple. However, we recognize that the market may not grant GME shares that premium because of the weak retail spending environment.
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