Stock pick: GameStop Corp. (GME) could be a daring play

A tricky sector to invest in

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Trailing 12-month stock chart for GameStop Corp. (GME)

The video game industry is a tricky sector to invest in. It’s quite cyclical and when consoles aren’t selling companies can suffer. Just look at the share price of GameStop (NYSE: GME) a popular Grapevine, Tex.-based video game retailer. In 2013 the stock price was up a whopping 100%, but it’s fallen nearly 13% year-to-date.

While some of that decline would be a result of people taking capital gains after such a run up, if you look at the company’s recent results, you’ll see just how mixed things can be. In the fourth quarter, total sales hit $3.15 billion, a 9.3% year-over-year increase, yet earnings of $1.90 came in below estimates thanks to weaker console sales.

They key is buying in when the time is right and many analysts say that now’s a good time to own some gaming companies, and especially GameStop.

Last year, two heavyweight companies released new consoles — Microsoft with Xbox One and Sony with the PS4 — and these are now flying off the shelves.

The PS4 was expected to exceed the 5 million units people thought it would sell in the first quarter of 2014, while the Xbox One is expected to sell more units than the Xbox 360 did in its first nine months on sale.

Curtis Nagle, analyst at Bank of America, upgraded the stock from a neutral to a buy on April 4, because he thinks the increase in console sales will “drive an acceleration in both sales and earnings trends.”

Now that the stock has pulled back somewhat, Edward Woo, an analyst with Ascendiant Capital Markets, thinks now could be an opportunity to get in. While he has lowered his earnings per share estimates, it’s still a solid company.

“The lower earnings outlook will increase investor’s skepticism on GameStop’s longer term uncertainties,” he writes. “However, we still believe that the new consoles should drive solid growth in revenue… and earnings in 2014.”

He points out that the company generates a lot of cash flow. It undergoing a $500 million share repurchase program and it has an attractive yield of about 3%.

The company’s fiscal year 2014 guidance is “pretty good,” wrote B. Riley & Co. analyst Scott Tilghman in a March 28 report. Sales are expected to grow between is 8% and 14%  and earnings per share should come in somewhere between $3.40 and $3.76, which is above 2013’s $3.01 EPS.

With a healthy year of console sales ahead — and new game sales will follow — some analysts think the stock, which is currently trading at $43 a share, could soar. Tilghman has a $64 12-month price target, Woo has a $51 price target and Nagle thinks it could hit $56.

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