Blockbuster Inc. Seeks To Move In a New Direction

By Relmor Demitrius -

Video rental giant Blockbuster Inc. (NYSE:BBI) released its fourth quarter financial results in January of this year.  They showed declining year to year revenue and a large loss per share, although this was due mainly to a one time goodwill charge.  At a quick glance one might think twice about throwing money at this stock.  The results were not impressive to the street apparently.  The stock has been under pressure of late, but has rebounded nicely the last two days, rising from a low of 30 cents to over 39 cents as of Friday.  The stock was trading over 70 cents in January before S&P put them on credit watch after the company released Q4 numbers.

The company currently sits at a 48 million dollar market cap.  They only have 122 million shares, and a large percentage of them are insider owned.  The company reported 42 million in free cash flow during their fourth quarter.  These are a few of the basic reasons I am keeping an eye on this equity.  Yes they have a high cost basis, and declining revenue trends doesn’t sit well with investors, but anytime a market cap is presented this low on a once largely profitable company, that is now dominating the market share of an albeit fading business model, it definitely should be looked at closely.  If this company were to rebound, this stock is currently priced for a huge dilution, bankruptcy, or a hostile takeover attempt, large gains are on the board.  If these things can be avoided, and certain goals of management are seen to fruition, then there is a possible play here.   CEO Jim Keyes has been on a path of promoting change with the company, and trying to show to the street that the company is committed to lowering costs, and moving into the digital age of media distribution.  He thinks the brand name is strong and will aid them greatly in stealing market share from Netflix and Redbox.  It is possible that Blockbuster can credit some of their revenue losses on too many unprofitable stores and a down economy.  Blockbuster is currently in the process of cutting the fat on their bloated retail store numbers, and the economy seems to be improving.

This will be the first of a series of articles covering this equity from all angles.  I would in the least case add this stock to my watch list and see how things developed.  Next up I will focus on their specific business model and attempt to see if there is growth in their other revenue ventures going forward, i.e. online renting and kiosk rental units (It would compete directly with Redbox and Netflix (Nasdaq:NFLX) in these areas).

Some quick thoughts before going forward, and some hints to angles I will cover in the future.

Possible reasons to avoid:

Possible reverse split coming in May or later.

Possible dilution of equity. (At these levels that seems unlikely).

Stock is still trading dangerously near all time lows.

Cash on hand would not sustain them long if revenues continued to drop dramatically.

Adding more debt would come at a great cost, as their credit rating has recently been dropped.

Possible reasons to buy this stock:

No one can release a movie before Blockbuster can. (Studio deals are still the envy of their competitors).

Low market cap

They still obtain free cash flow.

Stock is near all time lows.

Company has been hit hard with one time charges, and huge yearly losses are only paper losses, not cash losses.

Company CEO has recognized the need for change, and has a plan in action.

No Position in this Equity