Blockbuster_Miscalculated by ianmc1981


Blockbuster Miscalculated

Word Count:

Blockbuster (BBI) is a perfect example of what can go wrong when you
misread the industry trends and then realizing it, try desperately to
catch up.

stocks,investing,trading,options,technical analysis,george
leong,money,finance,small cap stocks

Article Body:
Blockbuster (BBI) is a perfect example of what can go wrong when you
misread the industry trends and then realizing it, try desperately to
catch up. In the period from late 2001 to 2002, Blockbuster was the
leader in the video rental business. Its shares were trading at nearly
$30 a share and its market-cap was at around $5.75 billion.

But there was a trend developing towards movie rentals via the Internet.
Blockbuster failed to recognize the growing significance of Internet
video rentals, a very poor miscalculation on its part. The shares have
steadily declined to the current $3.80 to $4.20 channel. Once a large-
cap, Blockbuster is now a small-cap and struggling to regain any sense of
direction. The company has entered into the Internet DVD rental business
but it has a lot of catching up to do.

Fundamentally, Blockbuster has lost money in the last three straight
quarters and struggling to grow its revenues, which are forecasted to
increase a mere 1.1% in fiscal 2006. Its estimated five-year earnings
growth rate is a mere 2.5% per annum, which is pitiful.

Blockbuster also has to deal with its massive debt load of $1.27 billion
or a debt-to-equity of 2.73:1, which suggests a weak balance sheet.
Couple this with poor working capital and you understand the high
financial risk. Faced with stagnant revenue growth and losses,
Blockbuster faces a difficult upside battle to regain its lost glory. The
odds are stacked against it.

In the face of Blockbuster is online DVD rental company Netflix (NFLX),
which debuted in May 200, trading at close to $40 in 2004 before sinking
to the $10 level in 2005 before the rally.

Netflix saw the future for DVD rentals and it was online and not via the
“brick and mortal” route that Blockbuster decided to maintain. In direct
opposite to Blockbuster, Netflix is profitable and has been for the last
three straight quarters. It has 4.2 million subscribers and growing. Its
revenues are growing and expected to surge 32.5% in fiscal 2007 whereas
Blockbuster is seeing non-existent revenue growth.
Blockbuster has entered into the online DVD rental arena but it is well
behind Netflix. Moreover, Netflix also operates the online DVD rental
business for Wal-Mart Stores (WMT), after the retail giant decided to
shut down its own online DVD rental unit and instead let Netflix run it.

Trading at 36.73x its estimated FY06 EPS, Netflix is not cheap. But if it
can continue its strong growth and earn the estimated $1.11 per share for
the FY07, the valuation becomes more reasonable. The pressure is clearly
on Netflix to deliver but it is on the correct path.

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