Diary: Games Group

GMG - cyclical or structural declinek, the debate rages on. Sketch notes here - I spend waaaaay too long on this blog.


On 23-Jun-2011, Christopher Waller at Seeking Alpha argued that the problem was purely cyclical.

Analyst Steve Baines recently put it on his Retailer-deathwatch Tumblr account. Oh dear, that can't be good. As he notes from an Independent article: "Game Group is poised to hire a restructuring team at Deloitte, the accountancy firm, to deliver a strategic plan for next year to help it turn around its dire performance."

 For those with a good memory, I promised to say why I didn't believe the cyclical argument. Christopher's view is that sales rise and fall with the release of next generation consoles. Whilst my rebuttal is not particularly robust, I do note an RNS dated 08-Dec-2010 which says: 

The difficult market has benefited from a strong launch schedule of new software titles and peripherals

and

As Microsoft's lead partner in Europe for Kinect, we took a very strong market share of the product in each of our territories.

 That sounds vaguely (although I admit my argument is a little weak) like an argument that profits should recover in 2011. Alas, GMG share pricee is down 90% over the ensuing year, vastly underperforming the market.

What beggars belief is the continual positive management spin on what is clearly a worsening situation. In its trading statement issued on 13-Jan-2011 for the christmas period, it reported declining absolute an lfl sales across all regions, including online. Yet management narrative was chirpy:

Customers continued to shop at GAME

Yeah, well, I guess two people do count as customers plural.  There are other gems like:

Our specialist proposition ... provided unique appeal for customers

and

we saw encouraging signs that customers are still looking for exciting products at reasonable prices

Yes, but according to the numbers, I'd say that they were only looking, not buying. The company points out

However there will be further innovative launches in the $40bn global games marketplace including Nintendo's new handheld 3DS, additional software for Move and Kinect, and an exciting line up of pc and console titles.

 If you're following the cyclical thesis, then we should expect some kind of pickup in 2011. After all, how much new hardware is required? Alas, it was not to be. On 16-Nov-2011, an IMS reported total and lfl sales down again:

Revenues across all categories: software, hardware, preowned and accessories are down year over year.

Despite the whole edifice slowly sliding down the slope, management felt that "the medium term strategy is making progress".

I'm with  Jim Chanos on this: it's going to look like value all the way down. I could be wrong of course, but there are risks aplenty. It has a PTBV of 0.35, if you like that kind of thing.

Diary: tcg, gmg, icp, pic, opts

TCG - Thomas Cook Group

Thomas Cook down 72% today as of writing on fears of its finances. Readers may recall that I tipped this as "one to avoid" for 2011. Unusually for me, I have been remarkably spot-on for this share. It has fallen 93% YTD, vastly under-performing the market. I am, of course, chuffed to bits at having made a good call.

I can't help thinking that there's actually a viable business tucked in there, if not for the debts. Maybe they'll be a debt-for-equity swap, wiping out current shareholders. I wouldn't say that's a prediction, though, that would be too bold an assertion. I prefer the Delphic Oracle approach - where there's sufficient ambiguity in what I say to be proved right whatever the outcome.

My verdict on this badboy is: avoid. I couldn't rule out a dead cat bounce, of course. No-one can do that. Except for those that can.

A poster on today's Motley Fool article on TCG pretty much sums it up in a nutshell:

This company has large borrowings and negative net tangible assets. It is in a highly recession-prone industry and also vulnerable to international unrest. IMHO it will not survive.

GMG - Game Group

Beleagured retailer GMG drops another 15% today. I can't imagine there's too much doubt that we're in the end-game (no pun intended) on this badboy, and now we're just waiting for the inevitable. It's an interesting share, because there's a poster who I highly respect who bought in on this not that long ago. The theory was that it was a cigar butt that was so cheap that there was a statistical likelihood that a more normal valuation will prevail at some point in the future. It's sliding downhill fast, mind, so that looks like an increasing struggle.

ICP - Intermediate Capital

ICP up nearly 10% today. I own this pup, so that's the kind of thing I like to see. It's on a PER of 6.9, PBV of 0.6. The company announced its results for 6 m/e 30-Sep-2011:

As the majority of traditional lenders continue to retrench from the credit market, we also see considerable opportunities emerging to acquire debt at attractive discounts in a distressed market, to provide finance to existing buyouts to restructure their overgeared balance sheet and to offer reliable financing solutions for new transactions, thereby delivering high returns to our institutional investors. The progress made on fundraising in a difficult environment is also a testament to our fund management franchise

I wont bore you with the numbers they reported, they look OK, nothing noteworthy. I have to admit I'm a little perplexed as to work out why the market upped the shares 10%. The results seemed fairly predictable to me. This kinda reminds me of what I saw with RWD earlier this year - shares marked up strongly on results that contained no surprises.

My investment "thesis" (not sure I like that term) is that the stock is cheap, the management have outlined where they believe growth will come from, and I believe them. So, a pretty simple idea: cheap, with bags of upside.

PIC - Pace

PIC is having a bit of a rebound the last couple of days. Given how far it's dropped, it's probably about time, too. Couple of points from the FT:

Exane forecast Pace’s problems to erode its cash pile to just $35m by the end of the year, though it said concerns over the balance sheet were misplaced. “We believe Pace should be able to accommodate any bump in the road by factoring part of its circa $400m of receivables,” it said. Separately, Pace was facing relegation to the small-caps in next month’s FTSE review.

 I can resist including the following quip from some wag on the bulletin boards:

I can´t see how this stock will correlate with the wider market from the point is has reached. More likely an Asian weather index!

 Amen to that!


OPTS - Optos - Healthcare equip and services - 225.8p/£161m

Shares up 0.6% on finals. Looking pretty good. Revenues up 35%, profit after tac up 63%, and generally all OK, except that they have increased net debt, and cash flow from operating activities is down.

PER is 11.3, ROE is 23%, gearing is 25%, z score 3.71, so there's nowt to dislike there. EV/EBITDA is 5.3, so you're definitely not overpaying.

OPTS is looking like a pretty interesting GARP idea, admittedly a bit riskier than average, and analysts do expect a 12% dip in earnings for 2012.

Other notes:

• unveiling Daytona, the next generation desktop retinal device, in 2012Q1
• Optos' core devices produce ultra widefield, high resolution digital images (optomaps) of approx. 82% of the retina, something no other device is capable of doing in any one image
• potential to offer opthamologists and optometrists the most powerful tools for disease diagnosis and management.
• expanded salesforce
• moving into new territories in Europe and Australi
• newly launched device 200Tx addresses important export markets such as Japan

I don't own any shares in OPTS, but I must admit it's giving me the warm fuzzies. I can see it as part of a smaller-cap riskier but high-growth potential share.

Dairy: GMG

Ah yes, GMG (Game Group) - and US equivalent GME (Gamestop) - a company doing the rounds amongst value investors so much lately that everyone's dizzy. Wait, I'm sure there must be better wordplay in it than that. Game over for Game Group? ... now that's just hackneyed. At the Value Investors Conference, legendary investor Joel Greenblatt has been touting it as a good and cheap company with a lot of negative sentiment, whilst at the same conference, Jim Chanos has been touting it as a value trap that will look cheap all the way down. Anyone who's been following HMV will know how that one works. In light of today's news, it's looking like Chanos 1, Greenblatt 0.

I had GMG lined up to talk about some time in the future, but in light of the fact that it's down 37% (was at nearly 41% at one point), I thought now is the time to talk about it. Clearly, when a share bombs 37% in a day, there's something wrong. It doesn't take long to find out why. They issued an IMS today. Some snipppets: lfl sales down 8.6% across all categories, including pre-owned [emphasis mine - and is it really too much for management to say "second-hand"?]. customer footfall down, and internet sales flat. online margin has doubled since launch of a new web platform, and online share has remained at 19%. group digital sales have grown over 40% YTD. pre-owned is 28% of total sales at 40% margin. GAMEwallet, a new way for customers to find and pay for digital games, launched in October.

Clearly, the market is focussing on the bad stuff, and dismissing the good stuff.

I've said it before, and I'll say it again: being a second-hand trader seems like a bit of a daft way to go for a major retailer. A "mom and pop" business can maybe get away with it, but major retailer, no. I continue to see Steam as a serious threat. I'm not a games player, but I get trial offers when I'm playing my Deus Ex Human Revolutions (great game, I love it. I'm replaying it actually). Steam will be able to lock down games tighter than a camel's arse in a sandstorm - so you can forget about second-hand games being a long-term business model - "Doctrine of First Sale" be damned!

The Motley Fool reported on 27-Sep-2011 that managers pledged to buy shares in GMG every month in lieu of 20% of their salaries. Perhaps the most insightful and convincing comment ever about GMG which clearly articulates why it's a sell is from "Stevokkenevo":

I would count myself as an enthusiast video gamer and have worked at Game in the past and I really can't see the company existing in 10 years time. The audience they target is non-enthusiast gamers and mums and dads. If this market grows out of playing video games they will have very few people to sell products to. Nearly everyone I know that plays games on a regular basis refuses to shop at Game because their customer service is disheartening and awkward.

If games go fully digital in the next 10 years with the increase in internet connectivity and speed, Game is dead in my opinion. Sounds to me more like the directors are just trying to convince people their business is sound.

On the same artcile, F958B (a poster I highly respect) offered the advice:

Investors are not required to have a buy/hold/sell opinion for every share in the market. If in doubt - leave it alone: take no action: do not short it: do not buy it. It can't go wrong then. Nowadays, we see periodic opportunities to invest in good businesses at sensible prices. There is no need to get involved with falling knives.

He continues:

My comment was also to remind investors that "falling knives" and "value that's too good to be true" is dangerous and more likely to end in losses than profits.

On 16-Aug-2011, James Emerson wrote a piece on Seeking Alpha, calling it a value trap:

fundamental changes in the industry have rendered the business model obsolete ... Consumers will download software directly to their gaming device and will play on websites like Zynga and Flonga bypassing GameStop completely and eliminating the market for new games.

There has, of course, been counter-opinions to his article. 

The ever-intelligent valuestockinquisition wrote an article about UK retailers on 18-Aug-2011. GMG was one of the companies he wrote about. He offer some additional insights:

On the surface many UK non food retailers trade with net cash on the balance sheets, but these do not reflect the reality of off balance sheet committments in the form of lease agreements. ... the fixed charge cover on the last balance sheet date is 1.6. By my reckoning a 4% fall in sales cet par would leave fixed charge cover below 1. ... So for the moment, despite valuation seeming to be attractive, I am not prepared to part with hard cash to buy any UK retailer.

An interesting comment by a poster on a BBS:

Game are their own worst enemy, they have pretty much given up with sensible retailing. And are now just after marketshare, check their trade-in deals page for a complete joke, Games that are for sale at Tesco for £25/£30 GAME are offering £35 trade in on them against a new release title. Funniest one was RAGE, Gamestation (part of game) were selling for £24.99 and GAME were offering £35 trade for it when people were trading towards Gears of War. Anyone can sell £10 notes for £5... GAME seem being undercutting and selling them for £4.95

The Motley Fool pulished an article about GMG today, in which the author expresses relief at not having pulled the trigger earlier on buying in. He called it a "Death or glory" punt. The article doesn't contain any new insights.


Having all said that @MrContrarian over at Twitter rates it a buy: "Game Group (£GMG):another warning. FY LFL down 7% at best, margin -150BP. At 11.75p PSR 0.02, EV/sales 0.06. Priced to go bust. Bt small pos" He has more investing acumen in his little finger than I have throughout my entire body, so you're likely to be better off listening to him than me. I asked him to explain his position, and he responded: "GMG will continue to shrink but if it survives to the next console cycle the PSR should revert somewhat. High risk high reward." A real cigar butt, then.

I leave you with this wit from a twit @GSElevator:

I'm not afraid of anybody, except maybe black guys who have scars... You know they didn't get them from falling off a bicycle.

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.