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HIVE EXCLUSIVE: Video Retail Rally

14 May, 2001 By: Seth Goldstein

Validating the bromide that every dog has its day, downtrodden video retailing stocks have staged a revival in recent months.

Blockbuster Inc. and Movie Gallery are selling for more than double the prices quoted late last year, and Hollywood Entertainment Corp. has pulled back from the under-$1-per-share abyss to reach $3.

Even Rentrak Corp., flat on its back for years, is standing again, helped by new management’s decision to buy back 750,000 shares. The stock, which had been as low as $2, now trades for about $3.50.

Radio Shack may be helping put a shine on Blockbuster shares, according to Wall Street. Big Blue is “clearly smart” to allow Radio Shack to build consumer electronics outlets inside Blockbuster locations, says Aram Rubinson of UBS PaineWebber. Rubinson also likes Blockbuster because it’s “basically recession-resistant” and it figures to play a lead role in the next generation of video games, including Microsoft’s Xbox.

The chain did spend a lot of time and energy hyping its video-on-demand joint venture with Enron Broadband, and the stock might have been expected to suffer when the much-ballyhooed arrangement fell apart eight months later. But Rubinson says investors haven’t paid much attention because the deal itself “wasn’t significant.” The VOD stumble was hardly noticed while Blockbuster stock vaulted from $6.75 on Oct. 19 to a 52-week high of $19.35 on May 3, before retreating slightly. At $18, it’s still $3 ahead of the $15 initial public offering price — the first time since the 1999 IPO that Blockbuster has been selling for a premium.

“It’s had a pretty good run,” says Rubinson, who suspects the run-up isn’t over. Blockbuster could hit $25 in the next 12 months, according to consensus estimates. Two reasons are DVD and increasing dominance at retail.

Despite a relatively slow-footed entry, Blockbuster’s sheer size has generated “a really nice market share on the DVD side,” notes Alexander & Associates analyst Greg Durkin. “It’s harder for the independents. They’ve got huge budgeting issues and their wallets are tighter.”

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