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Analyst: Blockbuster An ‘Undead Zombie’ in 2009

28 Jan, 2009 By: Erik Gruenwedel

Knocking Blockbuster Inc. as a 1980s brand that has overstayed its relevance in home entertainment is a common occurrence among some members of the media and on Wall Street.

Now, Rich Smith, analyst with online multimedia financial services site The Motley Fool, has gone one step further and declared the Dallas-based No. 1 DVD rental service the worst stock of 2009.

Specifically, Smith said Blockbuster, in addition to not generating a penny in real profit over the past seven quarters, has about $100 million in available cash and faces $615 million in long-term debt, including $200 million due this year.

Blockbuster was saddled with about $1 billion in debt when former parent Viacom Inc. kicked it to the curb in 2004. It has been trying to pay down that debt ever since.

The analyst said despite attempting to position itself to consumers as a one-stop convenience store for all things home entertainment, Blockbuster is diverting about 50% of its operating profit to pay creditors.

“It seems to me that Blockbuster will have to roll over a big chunk of debt this year,” Smith wrote. “And if you haven't noticed, banks aren't particularly eager to lend hundred-million-dollar sums right now, which leads me to believe that Blockbuster is facing a liquidity crisis.

Not so fast said Arvind Bhatia, analyst with Dallas-based Sterne Agee who covers Blockbuster.

Bhatia agreed there are risks for Blockbuster satisfying its working capital needs, a burden the analyst said nearly every industry is facing in the current economy.

He said Blockbuster’s long-term debt isn’t due for years, and ongoing cost-cutting efforts are sufficient to supply the chain with required liquidity. Bhatia said the company has alternative financing (at undesirable rates) in place — despite the credit freeze — should the need become acute.

The analyst added that with infamous renegade investor Carl Icahn on the board, Blockbuster has an ace in place for the mean streets of Wall Street.

“I can’t imagine in the very least that he wouldn’t give them a working capital line, considering he was back shopping them for a $1 billion Circuit City deal,” Bhatia said. “We think they will come out fine.”

Edward Woo, research analyst with Wedbush Morgan Securities in Los Angeles, concurred that Blockbuster faces the same challenges nearly every company and industry does: surviving in a credit-absent environment.

“Their recent positive performance shows that … things won’t be [so] bad that they will go out of business in the near term or this year,” Woo said.

Bhatia said given Netflix’s impressive quarterly results Jan. 26, the DVD rental business is sound.

“It’s telling that the DVD rental category is still robust,” he said. “Blockbuster is obviously not emphasizing the by-mail business, and Netflix took some customers from them. The category still has to be performing for Netflix to do well. The fact they have nearly 10 million customers shows that people are still renting DVDs.”

Blockbuster is slated to present Feb. 2 at an investor conference in Miami.

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