Are these 2 stocks in terminal decline?

Royston Wild discusses the earnings outlook of two London leviathans.

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Video games retailer Game Digital (LSE: GMD) has seen its share price haemorrhaging four-fifths of its value during the past year as demand for ‘traditional’ hardware kept on evaporating.

There are a variety of arguments that try to address why PlayStations and Xboxes are no longer flying off the shelves. From accusations that modern consoles are far too complicated for casual gamers, through to the rise of the smartphone and consequently gaming on the go, sales of the machines and their dedicated software continue to tank.

On top of this, the rising trend of gamers downloading content straight onto their devices is also taking a bite out of demand for Game Digital’s physical wares.

Game Digital again warned of the structural problems washing over the video games business last month, the company advising that while “the global video games industry is set to surpass $100bn this year… sales of physical software are expected to decline.”

These challenging market conditions caused sales at the firm to slump 6.2% during the 12 months to July 2016, to £866.6m. This caused pre-tax profits to hit £25.8m, down 84.1% year-on-year.

And City analysts certainly don’t see an end in sight for Game Digital’s woes. They expect the business to follow a 52% earnings slump in fiscal 2016 with a 45% drop in the current period.

This projection results in a P/E ratio of 9.8 times, below the bargain-basement benchmark of 10 times. But given Game Digital’s poor growth outlook, I reckon savvy growth seekers should avoid the stock even at current prices.

A smoking stock pick

Some would argue that, like Game Digital, tobacco giant Imperial Brands (LSE: IMB) also faces an uncertain future as cigarette smoking falls out of fashion.

An array of legislative measures, from public smoking bans to restricting the marketing of cigarettes, has amplified the public’s existing concerns over the health implications of tobacco consumption. While formerly the preserve of Western nations, such measures are now being adopted by emerging economies too with increasing gusto, putting an extra pile of pressure on the cigarette manufacturers.

However, I don’t believe this is a death knell for Imperial Brands. Indeed, while the firm saw sales volumes slipping 3% during the year to September, to 276.5bn sticks, the exceptional pricing power of brands like Gauloises and West propelled revenues 9.3% higher to £27.6bn.

Besides, the massive sums Imperial Brands has ploughed into its blu e-cigarette brand is helping the firm to become a major player in this fast-growing market. And sales of this product are centred towards the US, Britain, Italy and France, territories that account for almost three-quarters of the global vapour segment.

The number crunchers certainly expect earnings to keep trekking higher at Imperial Brands, and growth of 10% in fiscal 2017 is currently expected.

I reckon the outlook remains very rosy, and believe that recent share price weakness makes the firm a hot ‘dip’ buy, particularly given its very-attractive forward P/E ratio of 12.6 times.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended Imperial Brands. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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