NW,
Here's the part four of the Individual Investor Online's report on the video game industry. This part features Electronics Boutique (ELBO) and Funcoland (FNCO). My only complaint in reading the story is that the analyst uses a non-proforma comparison in the article which would inadvertently lead the unknowing investor into thinking the company did not perform as well, in earnings, this year as last. I believe a more accurate picture would have been to compare (pro-forma, based on the additional shares issued when the company went public last July 1998) quarter to quarter, year over year, which of course, is the only way to properly gage the growth of a cyclical business such as video game retail. The following link I believe demonstrates my point.
marketguide.com
As you can see from this financial results overview...every quarter has been better than the prior years comparable quarter for over the last three years when shown on a pro-forma basis.
I believe the article is very favorable to ELBO and even suggests that if Q-3 results surprise analyst, a more favorable multiple of 25 X could be assigned to ELBO. The analyst indicates that this would make the new price target $30.00 but my calculations based on Prudential's $1.45 projection for fiscal 2001 is $34.25. In my humble opinion, a blowout quarter is already underway...what with the company indicating the strongest one day sales in their 22 year history on 9/9/99. Anyway let me give you the article before I get too carried away.
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Game Retailers Look for Strong Consumer Demand
individualinvestor.com
by Adam P. Lowensteiner,
Senior Research Analyst
(9/30/99)
Part IV
Editor's Note: This is the fourth and final part of a series on the video-game industry. After Monday's intro, Tuesday's piece focused on the prospects for the three manufacturers of a game consoles. Yesterday's piece looked at 10 publishers of game software. Today's piece concludes the series with a look at two companies that are retailers of game products.
Video game retailers are at the mercy of two cycles, one is a technology cycle that takes three years or more to play out, and the second is the annual sales cycle that peaks during the holiday shopping season and bottoms out in the spring and summer.
The two leading companies in this sector ? Electronics Boutique (NASDAQ: ELBO - Quotes, News, Boards) and Funco Inc. (NASDAQ: FNCO - Quotes, News, Boards) ? are heading into the all important holiday season just as an old technology cycle is winding down and a new one is heating up. The question for investors is the extent to which the combination of these cycles can lift these stocks.
Electronics Boutique (NASDAQ: ELBO - Quotes, News, Boards) $24.69
Electronics Boutique has been flourishing, closing yesterday at $24.69. As recently as early July, shares were languishing around $13.75. But a good earnings announcement in August for the July 31 quarter and enthusiasm over the sector's prospects as the 128-bit consoles come on line have lifted the shares.
The company recently announced it had its best day of sales in its 22-year history, thanks to the launch of Sega Enterprises' (NASDAQ: SEGNY - Quotes, News, Boards) Dreamcast.
In addition, the company also announced a deal with America Online (NYSE: AOL - Quotes, News, Boards), a sign that in future years, video games on the Internet will be a source of revenue.
But the near term question is how much more room the stock has to run. Analysts forecast earnings for the 2000 fiscal year, which ends in January, of $1.25 per share, giving it a forward multiple now of approximately 20 times earnings. That's in line with most other specialty retailers. So although Electronics Boutique has good fundamentals, the stock will need a positive earnings surprise to get past its current level.
In the January 1999 fiscal year, the company earned $1.11 per share on sales of $573 million, compared to earnings of $1.38 per share on sales of $454 million. In the second quarter ended July 31, the company earned $0.03 per share on sales of $113 million, compared to a gain of $0.17 per share on sales of $102 million.
There's some potential for that. Sega's Dreamcast sold out quickly. That shows that there will be robust demand for many of the titles for Dreamcast that have yet to be released. Also keep in mind that companies like Electronics Boutique typically don't make tons of money on the hardware, but do better on the software.
The upcoming holiday season could be a robust one. In addition, the pending introduction of 128-bit game consoles from Sega's competitors Sony Corp. (NYSE: SNE - Quotes, News, Boards) and Nintendo Co., (NASDAQ: NTDOY - Quotes, News, Boards) should fuel a new cycle of demand and sales growth across the sector.
If Dreamcast causes the company to surge past analyst estimates this holiday season, the retailer could receive a multiple of 25 times, which could take shares up to $31.
Funco Inc. (NASDAQ: FNCO - Quotes, News, Boards) $17.50
Funco's stock always seems to be in a race with Electronics Boutique's stock, but it might be the cheaper of the two on an earnings-per-share basis. Funco was the hot stock of the pair about six months ago ? it ran from the low teens in February to $24.63 in June ? but has since lost some steam relative to its rival as Electronics Boutique gained some Wall Street sponsorship.
Funco is definitely the more tight-lipped of the two, just a glance at the number of press releases can tell anyone that. But Funco's management has always played their cards close to their vest.
Lately Funco's numbers have been slipping. In the first quarter of fiscal 2000, ended July 4, the company earned $355,000, or $0.06 per share, on sales of $42.5 million compared to earnings of $500,000, or $0.08 per share, on sales of $32.9 million a year ago. But the first quarter is typically a weak one for the company. Not only is it now heading into the year's strongest season, but it is also poised to capitalize upon the new product cycle.
The slump in earnings was aggravated by the sale of a rising proportion of higher cost, but lower margin products.
Funco can make some of that money back if a customer enters a store to swap or trade one game for another. The retailer can usually re-sell the exchanged package for a higher dollar amount than the credit it gives the consumer.
Funco should be able to hit analyst estimates of $1.71 per share in fiscal 2000 and $1.90 a share next year. What's more, the retailer is aggressively planning to capitalize upon the new technology cycle. Last year it added 64 stores, and it plans to open other 90 this year. That will give it a total of 400 locations. The top line should expand substantially. The company's challenge will be to keep same-store sales on the rise.
As mentioned before, Funco's management team has been quiet with guidance, but usually hits the analyst targets. Funco trades for about 10 times expected earnings, a lot cheaper than Electronics Boutique, which recently has gained some momentum investors. Funco's shares have traded as high as $24.63 only a few months ago. Unlike Electronics Boutique, Funco's average store size is about 1,650 square feet, or 150 more than the average Electronics Boutique. That is part of the reason why Funco's sales per square foot are a tad over $400 per square foot, and Electronics Boutique's were $720 last year.
Even so, Electronics Boutique is only set to grow its earnings per share by 12% over last year's figures, while Funco is expected to grow 11%. But with the new console wave that has just gotten underway, these companies should secure better earnings growth in the years to come.
Bottom Line:
Of the retailers, Funco is obviously the cheaper play right now, as Electronics Boutique has charged ahead with lots of good news hailing from management. Both have solid pasts, and should have strong futures. But given the volatility in both companies share prices during the past year, it will be a challenge to correctly time rallies.
Epilogue
All of the companies mentioned in this series should see some benefit in the upcoming months from the new products. But some will benefit more than others. Is there one company from the list above that can guarantee investment success? Probably not. But selecting some ripe stocks right now, before the holiday season begins, and multiples traditionally expand, could give investors a better performance than the market as a whole. A great way to grab some gains from these companies is to create a mini-portfolio, pick one stock from each group above. A conservative portfolio could be built around Sony, Electronic Arts (NASDAQ: ERTS - Quotes, News, Boards), and Wal-Mart (NYSE: WMT - Quotes, News, Boards), which is perhaps the largest game retailer, but hardly a pure play. A more aggressive investor might purchase Nintendo Co. , Take-Two (NASDAQ: TTWO - Quotes, News, Boards), and Funco. The real risk-taker might select Sega, 3DO (NASDAQ: THDO - Quotes, News, Boards) and Toys 'R' Us (NYSE: TOY - Quotes, News, Boards). Any way one slices it, the stocks above should have some gains in the months ahead. May the force be with you.
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Good luck,
RBL |
