Broker Recommendations

LONDON (ShareCast) - Results from computer gaming retailer Game Group (LSE: GMG.L - news) disappointed on Thursday morning, while the group's prospects have divided brokers KBC Peel Hunt and Charles Stanley.

Charles Stanley has initiated coverage with a "buy" recommendation and a price target of 170p, though it acknowledges that the retailer is "vulnerable to the likely slowdown in industry sales" as gamers await the next generation of gaming consoles.

Charles Stanley has taken the industry cycle into account when calculating its price target by applying a 50% discount to the retail sector's forward price/earnings multiple of 13.

"A key bull argument is that the current product cycle is different from previous cycles because all three key hardware manufacturers have successful consoles with products attracting a broader consumer base than in prior cycles. One key risk of this steep adoption curve is that it simply leads to a "saturation" point quicker than prior cycles, which in turn, could lead to an equally steep fall on the other side of the "growth and contraction" cycle that has historically characterised prior console generations," Charles Stanley analyst Peter Smedley observed.

KBC Peel Hunt has retained its "sell" recommendation and 100p price target and expects to downgrade its earnings estimates following the group's trading update.

"While the installed base of new generation consoles has increased markedly against previous cycles, enjoying a much broader demographic base, we still believe the concept of the console cycle will remain the primary driver of profits," said analyst John Stevenson.

"We believe absolute gross profit generation peaked in FY2009 and expect to see profit generation decline over a number of years until further major hardware releases, reflecting endemic price deflation and greater competition as product enjoys free supply," Stevenson said, adding that the growth in popularity of online gaming and digital delivery of software remains a threat to Game's business model.