At first glance, it seems that GameStop ($GME), which grew rich and famous selling video games, is likely to wither and die as its customers migrate from store-bought disc-based games to on-line play and downloads. But a funny thing seems to be happening on the way to oblivion. Unlike blockbuster before it, GameStop is embracing the future.

Good Numbers

I found $GME through one of my Smart Alpha stock models, which makes sense considering that basic company fundamentals figure prominently in my selection criteria and since $GME has some impressive data-points.

Table 1

  Company Indy. Median S&P 500 Median Total Dbt to Eq 0.05 0.32 0.78 LT Dbt to Eq 0.04 0.19 0.67 Ret. On Assets % TTM 10.51 5.95 5.40 Ret. On Assets % 5 Y Avg 5.54 7.03 5.71 Ret. On Equity % TTM 19.26 13.14 14.38 Ret. On Equity % 5 Y Avg 9.93 13.59 14.73

A strong balance sheet and strong returns on assets and equity (the five-year averages are depressed by large non-recurring charges in 2013) signal the potential for strong growth in the future. And better still, the stock appears to be attractively valued.

Table 2

  Company Indy. Median S&P 500 Median PE (Last 12 mos. EPS) 11.37 17.90 19.81 Price/Sales 0.47 0.66 1.99 Price/Free Cash Flow 11.16 24.36 26.33 Dividend Yield % 3.47 – – 2.01

To top it all off, $GME is buying back shares, thus providing an additional way (beyond a good dividend) to return cash to shareholders.

Notice what I did not show: growth rates. That's the Achilles' heel here. While EPS growth has been O.K. (in the 9% range), sales have been flattish. The growth has been occurring as a result of margin expansion. The reason for this is no great secret: On-line and digital gaming has been on the rise, thus taking market share from sales of physical discs through brick-and-mortar stores, analogous to what drove Blockbuster out of business. Margin expansion is fine for now. But sooner or later, $GME will have to start delivering on the top line.