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Sterne Agee Raises Target on GameStop

Investors are beginning to take note of GameStop’s (GME) digital growth strategy and will likely assign a higher multiple to that part of the company’s business, according to a research report by Sterne Agee.

Analyst Arvind Bhatia raised his price target on the shares to $30 from $26, based on a new target P/E of slightly under 10 times its calendar 2012 estimate of $3.10, up from 8.5 times.

Bhatia says GameStop’s digital business is expected to grow 50%.

“Assuming 15% operating margins in this business (versus 7% operating margins in the company’s retail business), GameStop could be generating about $1.25 in EPS from this segment by 2014,” Bhatia wrote.

He estimates that by 2014, GameStop’s EPS will approach $4, including the approximately $1.25 in EPS from its digital business. Assigning a 20 times multiple to the company’s digital business, a six times multiple to the company’s retail business and discounting it back, yields values in the $30-plus range by the end of 2012, Bhatia argues.

“Near to intermediate term potential catalysts include: first-quarter earnings in May, the E3 industry conference in June, hardware price cuts, possibility of Nintendo announcing its next console, recovery in GameStop’s used business, a debt-free balance sheet and continued stock buybacks,” Bhatia wrote.
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