ELBO chosen as =STOCK OF THE DAY= by Individual Investor Online.
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Electronics Boutique: The Anti-Meat Market (5/18)
Individual Investor Online Analysis
Analyst: Adam Lowensteiner 5/18/99
Attention high school girls: Getting dates for the prom is not going to be easy this year.
You see, the video game industry is coming out with zippier new technologies, like Sony Playstation 2 and Sega's Dreamcast.
And in a recent poll conducted by Electronics Boutique (NASDAQ: ELBO) before these product introductions, male teenagers said they prefer playing video games to going out on dates with female counterparts. No kidding.
So there's little surprise that Sean McGowan, an analyst with Gerard Klauer Mattison, picked up coverage of Electronics Boutique with a 'buy' recommendation just last week.
Electronics Boutique operates over 500 video and computer game stores. Most of the stores are located in the United States, but they can also be found in Puerto Rico, Canada, Australia and South Korea and the company is looking at new markets like Scotland and Israel. 'We're not afraid of entering new markets,' exclaims Joe Firestone, president and chief executive officer at Electronics Boutique.
The company, which went public last July, also sells its products through its website, ebworld.com, which it claims is profitable.
The video game business has been pretty strong in recent years thanks to the introductions of newer and more sophisticated game platforms. And newer products are expected to boost the upcoming Christmas season.
Afterall, Nintendo recently trotted out a new color Game Boy. This fall Sega is introducing its new game platform called Dreamcast. Sony plans to issue its PlayStation 2, which is to be DVD-based. It will have greater storage capacity than prior products, making the games more detailed. Also, games that go to the original PlayStation will be fully compatible with the new station.
Another key to the business: Loyal, rabid customers. The typical game-player is male, around 20 years old, plays on average four hours a day, and buys on average 17 games a year. This $6.1 billion domestic market's development has intensified of late as the technology has gotten better.
The introduction of personal computers for less than $1,000 has also boosted game sales.
And as a specialist in the business, Electronics Boutique feels it has a competitive advantage in a crowded market, which ranges from retailers like Wal-Mart (NYSE: WMT), Funco (NASDAQ: FNCO) a strip-mall based video game retailer, and your mom and pop shops scattered across the map.
For one thing, Electronics Boutique usually offers about 20 new games a week. 'The guy who buys 17 games a year,' says Firestone, 'is coming to Electronics Boutique [to shop].' He also points out that his company gets the new releases at least 7-10 days before other stores, and carries all titles. 'Stores like Wal-Mart have a better market share with the older titles,' he insists. 'They typically focus on the 'Top 40' list.'
Electronic Boutique has also been successfully incorporating its website, which the company claims is profitable. Management expects it to quadruple in sales this year to $16 million.
Electronics Boutique also carries a clean balance sheet, with $42 million in cash. As a result, it comfortably plans to open 100 new stores this year, and still barely touch its line of credit.
Analysts expect the company to earn $1.22 a share for fiscal (January) 2000, according to Zacks Investment Research. This is up from $1.11 in fiscal 1999.
First fiscal quarter consensus estimates call for $0.13 per share. But, this number could prove conservative if Sega's debut of Dreamcast is successful.
A potential longer-term catalyst is the company's plans to open a new type of store, called EB Kids. The company plans to open a pilot in September, and is aimed at the parent looking for educational games and software for the kids. It will be an 'all G-rated interactive store,' according to Firestone.
Even if Electronics Boutique earns the expected $1.22 a share, that makes shares at a recent $15.88 a share cheap, trading at 13 times consensus estimates.
Bottom Line
Electronics Boutique seems to have a secure position in the very competitive video game business.
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Good luck,
RBL |
