Resources

GME Valens Credit Analysis – Robust cash flows and a healthy liquidity profile indicate that ratings agencies and cash bond markets are overstating credit risk

November 9, 2017

  • Cash bond markets are overstating GME’s credit risk with a cash bond YTW of 5.145%, relative to an Intrinsic YTW of 3.855% and an Intrinsic CDS of 220bps. Moreover, Moody’s is overstating the firm’s fundamental credit risk with their Ba1 rating, two notches wider than Valens’ IG4 (Baa2) rating
  • Incentives Dictate Behavior™ analysis highlights that management members are material owners of GME equity relative to their average annual compensation, indicating they are well aligned with shareholders for long-term value creation. Moreover, they are not well compensated in a change-in-control, limiting event risk
  • Earnings Call Forensics™ of the firm’s Q2 2017 earnings call (8/24) highlights that management is confident about their title lineup for the second half of the year, and that their new PowerUp members are very active. They are also confident about the potential of Apple’s new iPhone launch
  • GME is trading at an 11.8x UAFRS-based P/E, which is around historical averages. At these levels, equity markets expect Uniform ROA to remain at current 11%-12% levels, accompanied by 5% Uniform Asset shrinkage going forward. Considering continued fundamental and competitive headwinds, these bearish expectations are likely warranted, and equity upside may be limited

You don’t have access to the Valens Research Premium Application.

To get access to our best content including the highly regarded Conviction Long List and Market Phase Cycle macro newsletter, please contact our Client Relations Team at 630-841-0683 or email client.relations@valens-research.com.

Please fill out the fields below so that our client relations team can contact you

Or contact our Client Relationship Team at 630-841-0683