Blockbuster - Profiting More Than the Profiteers

We all know that institutional investors have purchased Blockbuster (BBI) stock at much higher levels, most notably Carl Icahn who owns over 20 million shares. In Mid-June, Marathon Asset announced their acquisition of 5.1% of the company. At the time the stock was trading at approximately $2.80-$2.90 per share, nearly a 20% premium to today's price.

Turnaround efforts helped Blockbuster post better-than-expected profits for the fiscal first quarter in May, boosted by cost cutting, including store closures, reduced advertising and overhead expenses and a more profitable product mix. And, the fact that Blockbuster has abandoned a potential takeover of Circuit City has removed considerable risks from the stock. Yet, the market has failed miserably to factor in these developments.

Blockbuster trades under its book value of $2.88 per share and at a forward P/E of only 7. Currently, 45% of the shares are short and I expect that a short squeeze will come soon. Average analyst targets are well above $6 per share, and this company is well ripe for some sort of shakeup. They appear to be more an acquiree than an acquirer.

Anyone who reads my articles knows that I primarily look for undervalued stocks and provide an opinion on things which I believe the market is simply underpricing.

Disclosure: Author is long BBI

Comments

[beezlebub:]

wholeheartedly agree.... in a tough consumer environment, dvd's offer the cheapest form of entertainment (or close to it)..... as an aside, i get highly amused at the ranting of many others that bbi is dead due to its lack of presence in the download segment....BBI has the largest library of digitized movies, thx to the cheap acquistion of movie-link last year...this channel will be unveiled in the very near term...along with this unveiling, bbi will restart its marketing efforts.... i see nothing but upward momentum for the stock as these this efforts gain traction. it seems that as bbi slowed its marketing spend to focus on profitable enhancements to the catagory killing 'total access' product...investors seemed to forget how formidable bbi is in this market segment. though i will add the nflx has not forgotten, each of the last couple of earnings call they have tempered outlooks with comments like 'it depends on bbi's marketing effort' (paraphrased)... and finally, nflx's partnering with mfst's xbox for movies is not surprising, hastings (the ceo) sits on msft's board (how he got that position is beyond me)...it seems likely that bbi will partner w/ sony's playstation ,,,a tit-for-tat..though it remains unsaid if either partnering is exclusive...at any rate, enuff ranting from me...needless to restate, i agree with your assertions....

2008 Jul 18 10:18 AM

[optical amp...:]

Maybe the "market" has it eyes focused on the debt load BBI carries.

2008 Jul 19 06:39 AM

[Ames Tiedeman:]

What catalyst will ever move this name up again? Earnings alone won;t make this thing whole again.

2008 Jul 20 09:51 AM

[beezlebub:]

debt load has been declining rapidly...and will continue to do so, as cash generation heads to paying down debt....as for catalysts, near term spark off the current valuation won't take much....2H08 dvd rental slate is strong, cost cutting is in place, DVD's are a cheap entertainment option in a recessionary environment, roll-out of movie-link, rationalized pricing structure should be effective very soon...there are a host of things that get the stock moving,,,as for longer term...that is a much murkier call to make, and explains keyes attempt at cc....
not sure what 'make this thing whole again' means, but i do think the stock moves up sharply off its current levels, not to 20....but could reach mid single digits...nice % change

2008 Jul 25 09:57 AM

[beezlebub:]

i failed to note, but you may have guessed, i am long bbi

2008 Jul 25 09:59 AM