<<BBI at $7 seems to offer the same great risk/reward trade-off as Intel at $13, Time Warner sub-10, and NOK at $11>>
John,
Wanted to outline this trade once again, as BBI is once again in the $7s.
Disclosure: I've held BBI for approx. 18 months. Avg. is approx. $7.4 share. 2 regrets: (1) Not selling when BBI hit my target of $10; (2) Not buying more when BBI was in the $7s.
Regarding regret #1, that's okay. Rather than sell BBI in the $10s, I shorted an equal dollar value of MOVI in the $29s and covered today in the low $21s.
Message 21311138
Message 21586022
Regarding regret #2, I loaded up in the low $7s today.
Upside catalysts:
(1) Q3 upside surprise. Weekly rental statistics from IMDB are pointing to an upside surprise in Q3. For the week ending 7/3/05 to the week ending 7/31/05, the Top 50 US Video Rentals generated $588.5 Million, up over 14% from the $515.4 Million generated during the same period last year. This will translate into a very good Q3 for all rental players (one of the reasons I covered my MOVI short today).
imdb.com
(2) I maintain that Amazon will enter the US DVD Rental market and that it will enter via partnership with Blockbuster. If/when this partnership is announced, BBI should see significant upside.
(3) Carl Icahn thought Blockbuster was undervalued at $9. I imagine that he'll talk up the stock as well as look for potential bidders for some or all of Blockbuster.
(4) The online market is now a duopoly between NFLX and BBI. Duopoly equals market power. Market power equals higher prices. And higher prices equal better cash flow and greater profits going forward.
Also note the following accomplishments over the past year:
(1) Blockbuster Online launched in late-July 2004. In approx. 1 year, BB Online has attracted over 1 Million subscribers and is capturing 1 out of every 2 consumers who choose online. And now that Walmart has abandoned the online DVD market, the competitive climate has eased substantially. As a result, Blockbuster raised prices today. Going forward, Blockbuster Online should go from red to black, and raising prices today was a great start.
(2) Blockbuster successfully launched an in-store subscription service called MoviePass. From a standing start last year, MoviePass has attracted approx. 2.5 Million in-store subscribers. MoviePass subscribers visit the store more often than 1-off renters. More visits to the store mean more opportunities to cross-sell used DVDs, candy, etc.
Overall, Blockbuster weathered a significant storm over the past 12 months. With IMDB showing that in-store rentals are rebounding and with an easier competitive landscape online, I think that BBI has bottomed.
Barring a severe market meltdown, I don't see BBI going lower than $6. I'm looking for $10+ within 12 months. |
