SunTrust Cutting GameStop (GME) PT, Estimates on Star Wars: Battlefront Weakness

GameStop (NYSE: GME) traded down about 3% (in a weak market) yesterday, most likely due to a price cut the retailer has recently made on the Star Wars Battlefront game, analyst David Magee of SunTrust Robinson Humphrey said. Reviews for this game have been mixed, and, while not a “season-killer”, the analyst cut 4Q to the lower end of the guidance range ahead of the NPD numbers tonight. The price target was also cut to $45 from $50.

Trimming 4Q EPS number (to $2.13 from $2.23 ) to reflect both the slow start to the holiday season and the apparent underperformance of key titles.

The price cut on Star Wars Battlefront to $35 is discouraging but the Metacritic user reviews (4.5 out of 10) are indicative of a dud. Mitigating factors would include

1) GME receiving vendor assistance for moving the title out quickly

2) Star Wars could gain momentum when the newest film is released on 12/18

3) many customers will probably just select other games to fill the demand ostensibly created by strong console sales over the past year

The analyst believes a marquee title could be expected to contribute as much as 2%-3% of GME’s 4Q video game business in 4Q.

Additionally, software demand continues to be on the fragile side although it is early in the quarter. GME should benefit from its pre-owned business (the department that has gotten the most traffic during our store checks) and, longer term, by the increasing contribution coming from Tech Brands and collectibles (most of 2016 growth in our model comes from those newer businesses).

The stock currently sells at 8x on a P/E basis, 4.5x on a EV/EBITDA and pays a 4.4% dividend (which offsets the now modest YTD stock performance). No change to the Buy rating.

For an analyst ratings summary and ratings history on GameStop click here. For more ratings news on GameStop click here.

Shares of GameStop closed at $32.44 yesterday.

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