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Non-Tech : MOVI: Movie Gallery Inc.
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To: CFA who wrote (5)6/22/2005 1:22:56 PM
From: CFA   of 7
 
<<Looking to cover sub-$20 within 12 months, which would represent an over 30% gain. Downside catalyst will be missed earnings/lowered guidance within the next few months.>>

As expected, Movie Gallery disappoints. This is the first of what will be a series of disappointments.

This continues to be a no-brainer spread trade / short position, and it's nice to gain on both parts of the trade (long BBI, short MOVI).

The relative valuation between MOVI and BBI continues to be way out of whack. There's no reason why BBI should be trading at a discount to MOVI/HLYW, as BBI (1) is the far-and-away brand leader, (2) generates $6 Billion in revenue vs. MOVI/HLYW's $2.5 Billion, and (3) has a number of growth strategies in place such as Online, in-store MoviePass, etc. In addition, Hollywood Video's value proposition has decreased substantially now that its stores have to compete with Blockbuster stores that offer No Late Fees and in-store MoviePasses.

At the end of this trade, I expect BBI to go from a 10% discount to MOVI/HLYW to a 30% premium.
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