Analyst Upgrades Blockbuster22 Jul, 2008 By: Erik Gruenwedel
Hailed for its decision not to acquire Circuit City Stores Inc., increased same-store rental comps and 60% revenue from new releases, Blockbuster Inc. July 22 saw its investment rating upgraded from “neutral” to “buy.”
Citing a “quiet deal front” and “improving fundamentals,” Pali Research analyst Stacey Widlitz said she expected Dallas-based Blockbuster to report 2% overall same-store (open at least a year) comps, including 2% rental comps, based on EBITDA (earnings before interest, taxes, depreciation and amortization) of $23 million for the second quarter, ended June 30.
“As we see another potential acquisition unlikely, we believe Blockbuster will get credit for operational improvement over the next few quarters,” Widlitz said in research note.
Widlitz said she doesn't believe Blockbuster's forays into digital distribution via the Internet or kiosk will generate incremental revenue in the next two years.
“[Blockbuster] has no choice but to stay on top of the technology curve, we hope they will do it in a way that does not significantly affect cash flow,” she said.
The analyst said she didn't think the current economic recession and skyrocketing gasoline prices were hurting Blockbuster. Instead, she said DVD rental represented alternative lower cost entertainment.
“Rather than go out to a movie or other activity, we believe consumers are staying close to home and renting films,” Widlitz said.
The analyst expects Blockbuster CEO Jim Keyes to address its DVD rental giant's ongoing price simplification tests, which Widlitz said must be incremental to the top line while not shortchanging availability of new releases.
“We expect answers to these questions to come soon,” she said.
Blockbuster reports second quarter results Aug. 7.