If you're going to play, play to win. With better-than-expected earnings results just released from video game maker Electronic Arts (EA) , it makes sense to project strong results from GameStop (GME) .
The Texas-based video game retailer is set to report second-quarter earnings results after the closing bell Thursday. GameStop, which has beaten Wall Street's earnings estimates in five straight quarters, is riding a hot hand, thanks to improved business prospects, which compelled management to raised profit forecasts for fiscal 2016.
The company's decision to move beyond games not only has given GameStop better diversification, it also lessens the cyclical nature of the game industry, which is driven by new consoles and blockbuster games. The collectibles business is now projected to become a $1 billion revenue driver within three years.
GameStop has also adopted a ship-from-store service that allows its employees to access inventory data at any GameStop store or warehouse. The service allows any employee to ship products to any customer anywhere, including overnight delivery.
These maneuvers, among others, helped the company's gross profit rate to rise 330 basis points in the first quarter to 34.3%. Gross margin improved as the company remodels stores, which shows how well GameStop is able to manage costs.
The stock is cheap, too. GameStop shares, which closed Tuesday at $32.09, are trading at a forward price-to-earnings ratio of 8, which is 9 points below that of the average stock in the S&P 500undefined index. The company pays 37 cents per share in quarterly dividends, for a yield of 4.6% annually, or more than twice the yield of the average stock in the S&P 500 index. It pays to play GameStop's growth prospects.
The company is projected to grow earnings at an 11% average annual rate for the next five years, more than twice the growth rate of the average stock in the S&P 500 index. Now's the time to buy GameStop stock, which has risen 14% year to date, but is still down 28% over the past 12 months.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.