Now, granted, GameStop Corp. (NYSE:GME) isn’t profitable at all today, so there’s an element of “pie in the sky” to Oppenheimer’s prognostication about 2015 profits. On the other hand, GameStop is generating strong free cash flow, and that’s worth highlighting. Cash profits for the past 12 months exceeded $321 million (versus reported “GAAP” losses of $288 million). Is that enough?
Well, it works out to a price-to-free cash flow ratio of about 14.5 on a stock that’s expected to grow profits at 10% per year over the next five years, and that pays its shareholders a 3% dividend yield. My hunch, therefore, is that the stock is actually a bit overvalued at this time, as investors rush to overpay for a piece of the expected profits from the great changeover in gaming consoles.
Long story short: Oppenheimer is coming late to this game. GameStop stock was a buy a year ago, when it cost less than half what it does today. It’s no longer a bargain today.
Remember when we used to play board games?
A better bargain — if only a slightly better one — may be the stock of Mattel, Inc. (NASDAQ:MAT). Like GameStop, it sports strong free cash flow. In fact, its FCF number is actually a bit greater than the $807 million Mattel, Inc. (NASDAQ:MAT) reported in GAAP profits for the past year.
Mattel, Inc. (NASDAQ:MAT)’s also GAAP-profitable, nearly net-debt-free, sports a higher growth rate than GameStop (11%), and pays a better dividend (3.3%). According to analysts at Argus Research, this is all enough to make Mattel, Inc. (NASDAQ:MAT) a buy, and Argus named it so, and assigned a $51 price target, this morning.
Personally, though, while I prefer Mattel, Inc. (NASDAQ:MAT) to the momentum play that is GameStop, I’d like Mattel even more if its stock price would drop a bit. For the time being, 19.5 times earnings still looks like too much to pay for a 14.3% total return ratio.
My advice would be to avoid Mattel for now, but keep this idea in your toybox. At the right price, Mattel’s a quality stock, and will be worth buying.
The article Friday’s Top Upgrades (and Downgrades) originally appeared on Fool.com.
Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Mattel. The Motley Fool owns shares of GameStop and Microsoft.
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