Michael Gentile Long Gamestop, Short WD-40: Capitalize For Kids Conference ~ market folly

Monday, October 31, 2016

Michael Gentile Long Gamestop, Short WD-40: Capitalize For Kids Conference

We're posting up notes from the Capitalize For Kids conference 2016.  Next up is Michael Gentile of Formula Growth who pitched long Gamestop (GME) and short WD-40 (WDFC).

Michael Gentile's Presentation at Capitalize For Kids 2016

•    Long Idea is Gamestop (GME), largest video game seller in North America and globally.

•    Stock hasn’t done much over the past few years despite general increase in market indices.

•    Currently, 29% of float is short, 5.9x earnings, 3.5x EV/EBITDA, 19% FCF yield and 5.9% div yield.

•    Market belief: believes digital sales (currently 25% of all sales) will replace physical sales in the next few years. Also, GME has had poor Aug and Sept months.

•    Believes GameStop is the only retailer that does used business as well as it does. Furthermore, physical sales have an advantage over digital sales due to credits received for selling old games. This is a very important competitive advantage. Also, have a strong loyalty program, with 46 million members.

•    Believes virtual reality is a game changing technology and is all free option at this price.

•    Believes market is too focused on new hardware and video game sales, which will account for ~19% of gross profit in 2019.

•    The rest of their business is used sales, technology (they operate 1600 AT&T stores – very high profitability and non-video game related) and collectables business.

•    Since 2009, they have shrunk shares by 38%.

•    Target is: $50/share not accounting for virtual reality opportunity.

•    Short Idea is WD-40 (WDFC).

•    Currently, 29x P/E, 18.7 EV/EBITDA, 2.4% FCF yield. Believes stock price is priced to perfection.

•    From 2006 to 2012, NTM P/E has averaged 19x but over the last three years has jumped to 29x earnings.

•    Believes low interest rate environment has caused valuations to become extreme. The company has also benefited from lower oil (key input cost) and therefore has achieved higher margins.

•    Believes gross margins are primed to fall and multiple contraction given lower growth expectations.

•    Target is: $75/share and would cover short position.

Be sure to check out the rest of the presentations from Capitalize For Kids/Sohn Canada Conference

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