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Downgrades Hit Video Specialist Shares

20 Jan, 2006 By: Holly J. Wagner

A Bear Stearns analyst warned of the impending perils of video-on-demand in downgrading Blockbuster and Netflix stocks and lowering the Movie Gallery price target today.

“Fox recently announced plans to distribute movies simultaneously via DVD and video-on-demand. Our conversations with other studios suggest that similar moves are planned in 2006. With VOD's value proposition increasing, we believe it will take share of movie consumption dollars. We are lowering our out-year assumptions for box office and home video,” analyst R. Glen Reid wrote. He downgraded Carmike Cinemas along with the video specialists.

The danger is more for 2007 and beyond than for this year, he emphasized.

“We believe that Blockbuster will report a quarter in line with consensus, and that 2006 estimates are not jeopardized by VOD. Our call is more forward-looking; our estimate changes begin in 2007, when we believe Blockbuster will begin to be impacted by increased VOD.” he wrote. The same timeline applies to Netflix and in between, he wrote, Blockbuster would continue to build its subscriber base.

The studios hold the power and could make changes that would rock the industry as profoundly as sellthrough pricing for DVD has, he wrote.

“We are lowering our out-year rental projections under the assumption that VOD gains will come in part at the expense of video rentals. Our [Blockbuster] price target falls to $3 from $4.50. Our [Movie Gallery] price target falls to $3 from $4.50,” he wrote. Those changes accompanied downgrades from peer perform to underperform for Blockbuster and from outperform to peer perform for Netflix.

Netflix shares closed down more than 7.5 percent, or $1.95, at $23.47; Blockbuster shares were down 15 cents, or 3.73 percent, to $3.87; and Movie Gallery closed down 5.36 percent, or 31 cents, at $5.47.

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