Analysts Divided on Video Rental Business

by: Research Recap

Analysts remain divided on the prospects for the video rental industry and who the winners and losers may be.

In our last roundup of analyst comments at Alacra Pulse on Mar 3, Netflix (NASDAQ:NFLX) had just been downgraded by Bank of America Merrill Lynch, Susquehanna Financial and Kaufman Bros.

Now Cannaccord Adams has initiated coverage with a BUY rating and a price target of $85.

We remain confident that the company can benefit from aggressive new subscriber adds due to the digital transition as the majority of new web-enabled CE devices come with Netflix preloaded.

“Netflix stands to be a major beneficiary of the oncoming OTT TV/video product cycle. Despite being predominately a mail-order DVD rental company today, already 25% of the company’s subscribers are capable of direct video streaming to their TVs, and we expect this to explode with the rapid increase in web-enabled CE devices and brand awareness of Netflix.”

Ben McClure at Minyanville argues that Netflix “is almost priced for best-case scenario growth.” Using a discounted cash flow model he generates a share valuation of $74, close to the current level.

Cannaccord’s Jeff Rath also initiated coverage of Coinstar (NASDAQ:CSTR) at a BUY and set a $39 target. In a research note, he asserts that the company has “a solid plan in place” to expand the number of Redbox video kiosks it has installed, “with plenty of runway ahead before full market penetration becomes an issue.”

Zacks today upgraded TiVo (NASDAQ:TIVO) to Neutral from Underperform on its better-than-expected fourth-quarter 2010 results driven by higher revenues.

Despite being hit by the recession, TIVO has held up better than most companies that depend on discretionary consumer spending.

TiVo is also benefitting from winning its long-running patent infringement dispute (since 2004) against EchoStar Communications Corp. (NASDAQ:SATS), the parent company of Dish Network Corp.

This led to JPMorgan analyst Bridget Weishaar hiking her rating to Overweight from Neutral. Much of the company’s growth will come from agreements with cable providers and telecommunications companies, she believes, rather than sales of its set-top boxes. The margin on such agreements, she projects, will be about 80 percent.

Weishaar’s new price price target for TiVo is $23, up from from $15.

Meanwhile, Blockbuster (BBI) took a few more steps down the road to oblivion when Moody’s downgraded its debt to junk status Caa3 with a negative outlook and Roth Capital analyst Richard Ingrassia cut the stock to “Hold” from “Buy” a week after disappointing Q4 results.

All in all, the various company initiatives, including a stock split or a sale of convertible debt, are likely not to prove enough in the near term for the stock, and could actually upset shareholders in the case of a convertible deal, writes Ingrassia.

And Business Insider’s Dan Frommer is unconvinced by CEO Jim Keyes suggestion that Blockbuster’s retail legacy will be helpful in its switch to digital.

Sorry, but Blockbuster’s brand carries zero equity on the Internet. That’s like making the argument that Sam Goody or Tower Records could steamroll Apple’s iTunes just because it once had a large offline presence.

Dan Rayburn also makes a lengthy case for why Blockbuster is doomed at Streamingmedia.

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