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Wedbush Projects Heady 2008 for Blockbuster

16 Oct, 2007 By: Erik Gruenwedel

A day after encouraging the purchase of Netflix Inc. stock, Michael Pachter, analyst with Wedbush Morgan Securities, issued a report extolling Blockbuster Inc. shares.

The Los Angeles-based analyst said improvements to the competitive environment in movie rentals led to his upgrade of Blockbuster stock to “strong buy” from “buy.”

Pachter issued his report hours before Gallery filed Chapter 11 bankruptcy protection.

He projected the Dallas-based No. 1 video rental company's stock price to reach $8 per share target in fiscal 2008 — up from a previous $6 per share target.

Pachter said reduced marketing costs associated with Total Access, Blockbuster's online rental, in-store return program, coupled with a projected 1,000+ Gallery store closures would result in FY2008 revenues of $5.1 billion, compared to $4.9 billion previously forecast.

He said the closures could generate from $400 million to $500 million in incremental revenue for Blockbuster.

“It appears to us that new Blockbuster management is determined to operate the company's Total Access plan at a profit,” Pachter said in a statement.

He said Blockbuster had curtailed to five the number of free in-store movie rentals for Total Access members. Additional rentals were charged $1.99 per transaction. Marketing expenditures for Total Access, which totaled $300 million since inception, have been trimmed.

Pachter expects Blockbuster marketing for 2008 not to exceed $125 million. A price increase to $19.99 for the most popular Total Access plan could increase margins to 35%, according to the report.

The analyst remains upbeat on Blockbuster, despite projecting Total Access to drop 150,000 subscribers in the third quarter fiscal 2007, ended Sept. 30.

“We continue to believe that the rental market is stabilizing, and believe a strong lineup of films released on DVD this fall will allow Blockbuster to return to profitability,” Pachter said.

Blockbuster shares closed Oct. 16 up 8 cents to $5.40 per share.

The rental giant reports third quarter results Nov. 1.

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