Why it’s still worth playing Game

Ouch! One of my recent retail value tips has taken a bit of a tumble.

Yet this week’s figures from the firm in question were bang in line with our forecasts. And the outlook’s no worse than it was a month ago.

So was buying this stock a mistake… or is it one of the best-priced bargains around? Let’s take a closer look.

The share is Europe’s leading specialist PC and video games retailer Game Group (LSE: GMG). And the latest results weren’t exactly a winner. For the 12 months to end-January 2010, sales fell 10% compared with the year before, pre-tax profits were 28% lower and earnings per share dropped by 26%.

But this was all entirely expected. And it’s well known that with blockbuster game releases in short supply, Game is fighting heavy competition from a mix of internet pirates and supermarkets.

And the dividend, which is generally seen by the market as a statement of management’s future confidence, was lifted by 5%.

It means that on these latest numbers, Game is on a p/e of below five and a yield of over 6%. Also, there’s still net cash in the balance sheet.

Yet despite having plunged by two-thirds over the last two years, Game shares fell 13% on Wednesday. They’ve stabilised since, but that’s a nasty crash. So what gives?

The market seemed to be spooked because the chief exec and her sidekick are both stepping down. Ex-Ladbrokes boss Chris Bell will be standing in while the headhunters do their stuff.

Clearly, losing senior people is hardly good news. But the flipside is that new management could prove a shot in the arm for a business that’s finding life very tough on the high street.

Sure, current year sales and profits are likely to fall again. But that share price plunge of the past two years has already baked in much of the potential damage.

Even if net profits were to fall by a further 25%, Game would still only be on a p/e of 6.4, while the dividend would be over twice covered.

So, while it’s relatively high risk and certainly not for ‘widows and orphans’, I’ll say it again – Game remains a very cheap stock.