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8/3/2019 gamestop - janney
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Tony Wible, CFA 215-665-6529
Randolph Lee 215-665-4572
GameStop
GME - BUY
February 13, 2011
Q1 Q2 Q3 Q1
12
15
1821
2427
2010 2011
1 Year Price History for GME
Created by BlueMatrix
0
5
1015
20
25
Equity Research
Note
Entertainment & Digital
Media
GameStop(GME) - BUY
Price: $20.28Fair Value Estimate: $32.0052-Week Range: $25.75-$17.12Market Cap (MM): $3,070Shr.O/S-Diluted (mm): 151.4Average Daily Volume: 3,928,509Dividend: $0.00Yield: 0.0%
FYE: Jan 2009A 2010E 2011EEPS: $2.27A $2.67E $3.02EPrior EPS: NC NCP/E Ratio: 8.9x 7.6x 6.7x
Quarterly EPS:Q1 $0.43A $0.48A $0.49EQ2 $0.23A $0.26A $0.30EQ3 $0.32A $0.38A $0.44EQ4 $1.29A $1.57E $1.81E
FYE: Jan 2009A 2010E 2011ERevenue (M): $9,078A $9,459E $9,738E
Quarterly Revenue (M):Q1 $1,981A $2,083A $2,124EQ2 $1,739A $1,799A $1,870EQ3 $1,835A $1,899A $1,967EQ4 $3,524A $3,678E $3,778E
FYE: Jan 2009A 2010E 2011EEBITDA: 830.8A 873.8E 960.1E
LBO Analysis and 8K Support Takeout
Possibility and/or Short SqueezeINVESTMENT CONCLUSION:
KEY POINTS:
LBO Candidate At current prices, we believe GME presents an attractive targetfor an LBO given its low levels of debt, healthy cash flow, and low equitymultiple. At $20/share, GME trades at a low 6.7x forward earnings and 3.4x on anEV/Adjusted EBITDA basis. This is well below its 5-year historical multiple of16.5x earnings and 9.6x EBITDA, and reflects unfounded fears over digital threatsthat may actually create an ideal exit strategy for an LBO.
Is There Smoke? - GME recently filed a brief 8K locking management into the
company in the event of a change in control. This release should fuel moreconjecture over an LBO, as any financial buyer would need assurance thatmanagement will not leave. GME's management is talented as evidenced by the38% increase in market share over the past two years. and the fact it added 6million loyalty subs in under six months - a feat that is remarkable. This newsshould help support the stock, as short sellers (25% of the float) contemplate thepotential for a large takeout premium, which is supported based on our LBO model(attached on the next page).
LBO Analysis - Using a $30 takeout price (i.e. a 50% premium) at the end of2011, we estimate a takeover would cost $3.9 billion after accounting for advisoryand capital raising fees. Assuming a deal is funded with 40% equity ($1.6 billion)and 60% debt (consisting of 20% bank loans at 5% and 80% high yield debt at8%), GMEs average annual post-LBO free cash flow of $436 million could easily
pay the average annual net interest expense of $152 million and have excess cashto pay down $150 million in debt each year while paying a $200 million annualdividend (improving the deal's IRR). Using a 6.0x EBITDA (or 13.6x PE) exit in2015 would imply a total net return of $3.8 billion after accounting for dividends.This would equate to a healthy 39.5% IRR, which we believe could move evenhigher as some of our estimates could be considered conservative.
Fear Creates Exit Opportunity Digital threats continue to be one of the biggestoverhanging issues for GME, as investors fear digital will eliminate GME'sdependence on stores and packaged media. We believe these fears fail toappreciate: 1) GME's potential to arise as a major digital platform; 2) consumerpreference for games on packaged media that is portable and retains residual value(i.e. can be traded); and 3) the FCC's new broadband policies (passed 12/22/10)that will change the way consumers pay for broadband, and in the process, will
render big game downloads uneconomical. This fear may create an ideal LBO, asthe elimination of these fears (e.g. investors/consumers realizing the new realitiesof downloading in a Usage Based Billing world) could create an ideal exit strategywhile the core business remains sound and needs no significant capitalcommitment.
Research Analyst Certifications and Important Disclosuresare on pages 3 - 4 of this report
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LBO MODEL
Current Price $20.00 LBO Cash Flow Analysis 2010 2011 2012 2013 2014 2015
Take Out Price $30.00 Adjusted EBITDA $883.2 $908.4 $985.5 $1,005.2 $1,025.3 $1,045.8
Reqd Premium 50.0% YoY Growth 5.5% 2.9% 8.5% 2.0% 2.0% 2.0%
Shares 157.1 D&A $175.2 $182.2 $190.4 $194.2 $198.1 $202.1
Purchase Price $4,713.0 Stock Comp $39.3 $39.0 $40.6 $41.4 $42.2 $43.0Interest Expense, net $34.3 $12.7 $170.1 $162.6 $155.1 $145.7
Debt (End 2011) $98.9 GAAP Taxes $224.2 $236.1 $204.5 $212.4 $220.4 $229.2
Cash & Equiv (End 2011) $945.5 Tax Rate 35.3% 35.0% 35.0% 35.0% 35.0% 35.0%
Enterprise Value $3,866.4 Minority Interest ($1.5) ($1.2) ($0.8) ($0.6) ($0.4) ($0.2)
Advisory Fees $11.6 Net Income $411.7 $439.6 $380.6 $395.1 $409.8 $425.9
Fee % 0.30% +D&A $175.2 $182.2 $190.4 $194.2 $198.1 $202.1
Debt Issuance $38.7 +Stock Comp, Net of Tax $25.4 $25.3 $26.4 $26.9 $27.4 $28.0
Fee % 2.00% +Chg in Inventory ($47.2) ($21.5) ($40.1) ($40.9) ($41.8) ($42.6)
Total Deal Cost $3,916.6 +Chg in BS & Other $80.6 $70.9 $39.7 $40.5 $41.3 $42.2
Operating Cash Flow $645.7 $696.5 $597.0 $615.8 $634.9 $655.6
YoY Growth 0.2% 7.9% -14.3% 3.2% 3.1% 3.3%
Equity $1,566.7 Capital Expenditures ($190.2) ($190.2) ($190.2) ($190.2) ($190.2) ($190.2)
% of Reqd Cash 40% Free Cash Flow $455.5 $506.4 $406.8 $425.6 $444.7 $465.4
Debt $2,350.0 YoY Growth -5.2% 11.2% -19.7% 4.6% 4.5% 4.6%
Banks Loans $470.0 LBO Debt Repayments $0.0 $0.0 $150.0 $150.0 $150.0 $150.0
% of Debt 20% % of FCF used for Debt Repay 0.0% 0.0% 36.9% 35.2% 33.7% 32.2% Interest Rate 5.0% Dividends $0.0 $0.0 $200.0 $200.0 $200.0 $200.0
Senior Notes $1,880.0
% of Debt 80%
Interest Rate 8.0%
Debt/Cash Balance 2010 2011 2012 2013 2014 2015
2012 EBITDA $985.5 Bank Loans
2012 PF Net Income $485.8 Balance (BOP) $198.9 $98.9 $470.0 $320.0 $170.0 $20.0
- Paydown $0.0 $0.0 $150.0 $150.0 $150.0 $20.0
EV/EBITDA (2012) 3.9x Balance (EOP) $198.9 $98.9 $320.0 $170.0 $20.0 $0.0
P/E (2012) 8.0x
Debt/EBITDA 2.4x Senior Notes
EBITDA/Int Exp 5.8x Balance (BOP) $0.0 $0.0 $1,880.0 $1,880.0 $1,880.0 $1,880.0
- Paydown $0.0 $0.0 $0.0 $0.0 $0.0 $130.0
Balance (EOP) $0.0 $0.0 $1,880.0 $1,880.0 $1,880.0 $1,750.0
Exit EBITDA 6.0xExit P/E 13.6x Debt Ba lance $198.9 $98.9 $2,200.0 $2,050.0 $1,900.0 $1,750.0
Exit Enterprise Value $6,274.7 Interest Expense $36.0 $14.5 $170.1 $162.6 $155.1 $145.7
Ending Debt $1,750.0
Return on Sale $4,524.7 Cash $647.2 $945.5 $1,002.4 $1,078.0 $1,172.8 $1,288.1Total Return w/ Divs $5,324.7 Interest Rate 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Initial Invest. $1,566.7 Interest Income $3.2 $4.0 $4.9 $5.2 $5.6 $6.2
Total Net Return w/ Divs $3,758.0
IRR 39.5% Net Interest Expense $32.8 $10.5 $165.3 $157.4 $149.5 $139.5
Required Funding
LBO Return
Deal Metrics
Target Capital Structure
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IMPORTANT DISCLOSURES
Research Analyst Certification
I, Tony Wible, the Primarily Responsible Analyst for this research report, hereby certify that all of the views expressed in thisresearch report accurately reflect my personal views about any and all of the subject securities or issuers. No part of mycompensation was, is, or will be, directly or indirectly, related to the specific recommendations or views I expressed in thiresearch report.
Janney Montgomery Scott LLC ("JMS") Equity Research Disclosure Legend
Janney Montgomery Scott is a market maker in the securities of GME, and may at any time hold a long or short position in thissecurity.
Janney Montgomery Scott may seek compensation for investment banking services from the subject company (ies) GMEsecurity in the next 3 months.
The research analyst is compensated based on, in part, Janney Montgomery Scott's profitability, which includes its investmentbanking revenues.
Definition of Ratings
BUY: Janney expects that the subject company will appreciate in value. Additionally, we expect that the subject company willoutperform comparable companies within its sector.
NEUTRAL: Janney believes that the subject company is fairly valued and will perform in line with comparable companieswithin its sector. Investors may add to current positions on short-term weakness and sell on strength as the valuations orfundamentals become more or less attractive.
SELL: Janney expects that the subject company will likely decline in value and will underperform comparable companieswithin its sector.
Price Charts
Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q110
20
30
40
50
60
2008 2009 2010 2011
01/22/09I:B
10/20/09N
05/27/10B
Rating and Price Target History for: GameStop (GME) as of 02-10-2011
Created by BlueMatrix
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Janney Montgomery Scott Ratings Distribution as of 12/31/2010
IB Serv./Past 12 Mos.
Rating Count Percent Count Percent
BUY [B] 184 51 18 10
NEUTRAL [N] 155 46 4 3
SELL [S] 7 3 0 0
*Percentages of each rating category where Janney has performed Investment Banking services over thepast 12 months.
Other Disclosures
Investment opinions are based on each stock's 6-12 month return potential. Our ratings are not based on formal price targets,
however our analysts will discuss fair value and/or target price ranges in research reports. Decisions to buy or sell a stock shouldbe based on the investor's investment objectives and risk tolerance and should not rely solely on the rating. Investors should readcarefully the entire research report, which provides a more complete discussion of the analyst's views.This research report is provided for informational purposes only and shall in no event be construed as an offer to sell or asolicitation of an offer to buy any securities. The information described herein is taken from sources which we believe to bereliable, but the accuracy and completeness of such information is not guaranteed by us. The opinions expressed herein may begiven only such weight as opinions warrant. This Firm, its officers, directors, employees, or members of their families may havepositions in the securities mentioned and may make purchases or sales of such securities from time to time in the open market orotherwise and may sell to or buy from customers such securities on a principal basis.Supporting information related to therecommendation, if any, made in the research report is available upon request.
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