As spring springs across the land, Foolish minds turn to thoughts of the weekend, and of play. Of course, Fools being what they are, their thoughts can't help but drift further out, to Tuesday morning, and more play. For that is when Motley Fool Stock Advisor recommendation GameStop (NYSE:GME) announces its Q4 and full-year 2006 results.

What analysts say:

  • Buy, sell, or waffle? Fifteen analysts follow GameStop, four more than around this time last year. Of these, 11 rate the stock a buy, and four a hold.
  • Revenues. On average, analysts expect to see quarterly sales rise 27% to $2.12 billion.
  • Earnings. Profits are predicted to rise even faster, up 45% to $0.80 per share.

What management says:
GameStop made three notable announcements this quarter -- one I expect investors to focus on, and two that are multiple times more important than that one. First, the irrelevant but high-profile news: GameStop announced a 2-for-1 stock split last month. CEO Richard Fontaine explained the move as being aimed at making the "stock more attractive to a broader range of potential investors," and expressing "the confidence that the Board and I have in the GameStop buy, sell, trade strategy and the future of video game growth worldwide." Personally, I think it does a better job of expressing how management is wasting time on irrelevancies, but that's just me.

More important than the issue of how many slices there are to the corporate pie, GameStop also announced its intention (not a requirement, though) to pay down $150 million in debt. Now that expresses some confidence -- confidence that the company will be bringing in sufficient cash profits to pay off its creditors. Also more important than stock splits: the firm's decision to convert all current shares of Class B stock (each of which currently carries 10 votes in shareholders' meetings) into plain vanilla Class A stock (one share, one vote). GameStop has leveled the playing field, and that's a good thing for investors, democracy, and apple pie (careful not to split the slices too thinly!).

What management does:
GameStop's reviving gross margins lend credence to management's optimism. And although operating and net margins look a little weak, hurt in part by stock-option expensing, it's worth pointing out that free cash flow for the last two quarters was up 150% in comparison to last year's cash profits -- considerably ahead of revenue growth that rose "only" 108%.

Margin

7/05

10/05

1/06

4/06

7/06

10/06

Gross

27.4%

28.6%

28.2%

28.7%

29.0%

29.0%

Operating

5.2%

5.0%

6.7%

6.4%

6.1%

6.1%

Net

3.2%

2.4%

3.3%

2.8%

2.3%

2.4%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Fool co-founder David Gardner, who has twice tapped GameStop for inclusion in his side of the Motley Fool Stock Advisor portfolio, praised the company for turning in a "great holiday season, despite the well-known shortages of next-generation consoles from Sony and Nintendo" back in January. Also tickling David's fancy, the firm's announced the purchase of Blockbuster's (NYSE:BBI) Rhino Video business, which gives GameStop 72 more locations from which to trade used goods and collect cash profits.

To the downside, David reminded us in December to watch one threat looming on the horizon: "direct-to-consumer sales of games. [However, game] makers aren't yet offering their flagship titles for download, and [David thinks] it'll be a while before they do."

Something to keep in mind for anyone invested in fellow Stock Advisor pick Netflix (NASDAQ:NFLX): You'll see the parallels to video-on-demand threats from the cable operators and TiVo (NASDAQ:TIVO).

GameStop, Netflix, and TiVo are all Motley Fool Stock Advisor recommendations. To find out how they are helping the newsletter beat the market, sign up today for your free 30-day trial.

Fool contributor Rich Smith does not own shares of any company named above. The Fool has a disclosure policy.