Blockbuster Offers Big Upside Potential

Includes: BBI, NFLX
by: Brian Harper, CFA

For the risk tolerant, Blockbuster (BBI) offers big upside potential.

The company is obviously facing increased competition in many forms. The most formidable is NetFlix (NASDAQ:NFLX), which was the first to start doing the mail order thing with DVD's and has grown rapidly. Video on demand and other new technologies are also a threat to the traditional in-store video rental market.

Blockbuster has significant debt, which was inherited as a result of a special dividend paid prior to their total spin-off from Viacom (NYSE:VIA). Blockbuster's cash flow has been under pressure in recent years due to a big investment in marketing their mail order business and other initiatives.

Blockbuster: risky but not without its potential rewards

However, the worst is clearly behind them. They have already outlayed their primary marketing dollars, and their working capital situation should go from being a cash drag to cash neutral at worst. As they close underperforming stores, customers are driven to alternative stores, which has been pushing up comp numbers. Their online business is approaching break even.

Blockbuster should generate nice cash flow going forward, which will be used to pay down their sizable debt. Overall, comparisons should be much more favorable going forward, and should Blockbuster sell their Gamestop division, debt repayment will be much accelerated.

BBI-NFLX 1-yr comparison chart:

BBI-NFLX 1-yr comparison chart

Comment on this article