Blockbuster: Massively Undervalued

Blockbuster (BBI) looks massively undervalued. The current share price of $1.15 doesn't reflect the fair value. BBI is trading at a forward PE of 3.5 which is 4 x less than the average P/E of the S&P500. BBI trades at less than 1/2 its book value of $2.69 and the price to sales ratio is amazingly low at only 0.05. Competitor Netflix (NFLX) is trading at almost 4x its book value of $5.69 at a share price of $18.95, and trades at 1 x sales and has a forward P/E ratio of 12.9.

On Wednesday the BBI share price rallied from a low of $1.16 to a high of $1.50 per share and closed up 10% at $1.32 in a down market day. The reason for the rally was that BBI gave investors a bullish earnings update, due out Nov 6, 2008.

BBI reiterated its full-year 2008 adjusted EBITDA guidance. The Company expressed comfort with third quarter 2008 analyst estimates. Contributing to the third quarter results, domestic same-store revenues increased 5.1% with domestic same-store rental revenues up 0.8%.

BBI NOTES:

As a result of the initiatives we have put in place, the Company delivered its third sequential quarter of positive domestic same-store sales, an especially significant achievement in today's retail environment. We are also reiterating our previously announced full-year 2008 adjusted EBITDA guidance," said Jim Keyes, Blockbuster Chairman and CEO. "Blockbuster's core rental offering provides customers with an excellent value, which is especially important in these challenging times. We believe this consumer value, along with the steps we are taking to control costs and transform Blockbuster into a multi-channel provider of entertainment, positions us well for both the near- and long-term.

ANALYST NOTES:

"In this environment, reaffirmation of guidance is great news and this gives more credence to the theory that people are staying at home rather going out and spending money," Stern Agee analyst Arvind Bhatia said.

In August BBI said it expected 2008 adjusted earnings before interest, tax, depreciation and amortization (EBITDA) in the range of $300 million to $315 million, which corresponds to net income in the range of $21 million to $36 million.

In August Wedbush Morgan lowered its price target  BBI from $7 to $5.50. The firm maintained a Strong Buy rating on the stock.

The firm notes that BBI Q2 earnings results were generally in-line with the Street estimates, "although the investment in rental inventory drove rental margins slightly lower." Accordingly, the firm said it adjusted its FY08 and FY09 estimates in order to reflect slightly lower margins and slightly higher comps. Wedbush sees BBI reporting FY08 EPS of $0.15.

Wedbush's new price target on BBI is based on 14x the firm's FY09 EPS estimate. With the stock trading around $2.96 today, Wedbush's lowered target represents a potential gain of more than 85% from current levels.

Here we are 2 months later and the stock price has dropped hugely to such an unreasonably low level. With the fact that BBI has just given a positive earnings outlook, this is now a must buy and makes BBI my top pick potential percentage gainer.

BBI new investors at the current price could have an easy double and potential triple in a 3-6 month time frame.

Also, on Friday, Motley Fool wrote a piece on BBI suggesting BBI is now a takeover candidate, and potential buyers could be NBC Universal or Walt Disney (DIS). The buyer would get instant access to a nationwide distribution system in three parts, plus a quality management team for the new division, all at a very reasonable price.

Disclosure: No positions.

Comments

[stockresear...:]

Good article I agree BBI should see $4 to $5 next year.

BBI is about to enter a huge earnings growth phase

BBI has a forecasted Earnings Growth Rate of 42.00%, BBI has a 12 Month forecasted EPS of $0.29 per share

NFLX has a forecasted Earnings Growth Rate of 33.00%,NFLX has a 12 Month forecasted EPS of $1.46 per share.

2008 Oct 26 11:58 AM

[User 286619:]

How many shares does Carl Ic own?

2008 Oct 27 11:30 AM