Bharper

Blockbuster: Until It Acknowledges Some Realities, I'm Avoiding Shares

Blockbuster is spending tons of money on advertising to build subscriber growth, which explains the deterioration in operating income. Online subscribers have relatively low churn, so the cost is a no brainer. And video downloading is still a joke, to be frank, at a negligible percentage of industry revenues. All this speculation as to which technology is going to replace what consumers like and are comfortable with sounds like fortune telling.

Blockbuster's cash flow varies significantly from quarter to quarter, mostly due to working capital items. This shouldn't be extrapolated.

The company has paid down most of their debt since the Viacom split-off, and shares are undervalued.

Blockbuster Offers Big Upside Potential

This is definitely a riskier play. But in terms of being a declining business, I think it is more like a RBOC type of attrition than, say, Kodak film where the substituting technology will all but destroy the traditional business. Certainly there is competition in many forms, but there is definitely a place for the traditional rental market.

Blockbuster has been this levered before, and they were able to pay down their debt in a few years. They have cut total debt by about $270 million in the past year.

Also, book value is sort of depressed since they paid a $5/share dividend to Viacom. So this sucked $920 million out of equity.

I have a base target of $10. I think the co can generate free cash flow of at least a buck a share, and that is with the current debt load.