Tuesday, September 27, 2011

Diary: DPLM, GMG

Since trying to write a diary every day, it's amazing to find at how I'm bursting with things to write about.

DPLM - Diploma
Readers may know that I'm a holder of this share, and like it for its reasonable price, reasonable returns on equity, and pleasant growth. DPLM issued a pre-closing statement today, sending the shares up nearly 9% at the time of writing. Revenues are expected to be up 16%, operating margins strong, and PBT likely to be at the top end of expectations.

GMG - Game Group
I'm not a holder of this one - it gives me the heebie-jeebies. GMG is a computer games retailer. Everyone is trying to work out whether it has an obsolete business model, and is doomed to failure, or it is just in a games cyclical low point. Trading on a PER of 3.8 and PBV of 0.2, this is one of those shares where you're either right, or you're wrong, with big risks and big payoffs to match. Interim results published today made for bleak reading. Like-for-like was down 9.9%, they're closing stores; but gross profit margins were only down a little: from 26.0% to 24.3%.

One of my major worries is that the internet will kill this business. The internet couldn't be more perfect for game-makers. I think one has to be very careful about the market for second-hand games (no, I'm not going to call them "pre-owned"). Whilst the "doctrine of first sale" means the practise is of course perfectly legitimate, the game-makers clearly don't like it, and have even spoken out to that effect. With the advent of things like the online Steam system, they could potentially kill-switch second-hand games. Of course, they'll be a bit subtle about it, and apply plenty of obfuscation. I don't think they're planning to do it, but imagine a scenario where you can download a game for free, try a few demo levels, and then have to pay to unlock the full game. That kind of thing would kill the second-hand games trade stone-dead. I'm not saying it is going to happen, but with improved internet connections, the murmurings of the game-makers, the ascendancy of Steam, I think the threat is quite credible.

On the upside to all this, GMG will maintain dividends, and irrevocably announced an intention to take 20% of their fees as shares for the next 12 months. The dividend yield is a monster 20%. At the interim stage, the company had net debt, although this is fairly typical; and moves into net cash at the final stage.

So, it might be worth a speculative punt. Having said that, there's quite a lot to choose from in the stock market at the moment.

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