Netflix's Hundred-Mil Buyback

Despite the talk of constriction in the credit markets, Wall Street's buyback binge continues. Earlier this month, we put a loupe to the luxurious buyback plans at Tiffany (NYSE: TIF  ) . Today, we examine a more plebeian repurchase pact: Netflix's (Nasdaq: NFLX  ) plan to buy $100 million of its own stock over the course of this year.

Can it pay?
Easily. Cash-rich Netflix has just under $400 million in cash and equivalents in its war chest. Netflix could buy back $100 million worth of shares this instant if it was of a mind to.

Moreover, Netflix's cash stash is growing. The way I calculate free cash flow for this company is to start with operating cash flow and subtract capital expenditures -- the usual procedure -- suggesting that free cash flow for the year is $246 million. But seeing that owning a well-stocked library of DVDs is key to Netflix's business, I also ding cash flow for the cost of building up said library -- that was $222 million last year. The resulting figure -- $24 million -- may be a whole lot less than $246 million, but it shows you that this company generates cash profits under even the most ultraconservative accounting treatment.

Should it pay?
Not in my opinion, no. Consider a few statistics, comparing Netflix to its chief rivals:

Trailing P/E

Price-to-
Free Cash Flow

Projected
Growth Rate

Netflix

25

66*

18%

Hastings (NASDAQ:HAST)

11

6

14%**

Blockbuster (NYSE:BBI)

N/A

N/A

14%**

Source: Yahoo! Finance.
*Calculated using a free cash flow number of $24 million.
**Yahoo! Finance does not give growth rate projections for either Hastings or Blockbuster. By default, rates listed are for the "Music and Video Stores Industry" to which all three companies belong.

It's nice that Netflix has the cash lying around and all. I sympathize with management's desire to return it to shareholders by reducing the share count, thereby increasing the worth of those shares remaining after the buyback. But I simply don't see Netflix as attractively priced -- under either a P/E or price-to-free cash flow basis. The growth rate doesn't seem to justify what these shares cost.

That said, archrival Blockbuster is an unmitigated disaster, and even less deserving of buybacks. Hastings, on the other hand ... well, if it grows anywhere near as fast as the analysts expect this industry to grow, it could be a really interesting play on a dying business model. But that's a gigantic if for a variety of reasons I won't go into here.

Foolish takeaway
Fortunately for Netflix shareholders, the more I look, the more today's news looks like a PR announcement and the less it resembles a commitment to waste money buying back overpriced equities. If you read the press release carefully, you'll see that the repurchase authorization is for an amount described as "up to $100 million."

These purchases are also to be made "from time to time ... and in such amounts as management deems appropriate."

And that is about the furthest thing you'll find from an ironclad commitment to buy back shares, folks.

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  • Report this Comment On March 08, 2010, at 10:22 PM, fdgxdfgxcf wrote:

    netflix bought back stocks in order to raise their return on equity at a whopping 36%. They basically cheated because they arent really producing more bang for your buck. They merely juss leveraged themselves. The cash and cash equivalents you speak of were raised through a 200 million dollar notes playable filed during the same year of the buyback. The total liabilities from 2008 to 2009 nearly doubled. The cash they raised is probably perfect timing as netflix will need it as Walmart has recently acquired vudu. Vudu is similar to internet streaming videos. Although BBI is dead, many netflix competitors are out there. Physical dvds have redbox. VOD's have wal mart amazon. It is my sincere opinion after doing a research project that netflix's survivability will need heavy advertising to gain customers and providing ease of use and establishing a stronger firm brand. Netflix should steer cleer of cutting prices because they would not stand a chance with a price war against wal mart. stumbled upon this article as i looked for the actual stock price netflix did the buy back. Currently 70 dollars so i know netflix made a lot of money. They should take advantage and redistribute some of their stocks.

  • Report this Comment On March 08, 2010, at 10:23 PM, fdgxdfgxcf wrote:

    netflix bought back stocks in order to raise their return on equity at a whopping 36%. They basically cheated because they arent really producing more bang for your buck. They merely juss leveraged themselves. The cash and cash equivalents you speak of were raised through a 200 million dollar notes playable filed during the same year of the buyback. The total liabilities from 2008 to 2009 nearly doubled. The cash they raised is probably perfect timing as netflix will need it as Walmart has recently acquired vudu. Vudu is similar to internet streaming videos. Although BBI is dead, many netflix competitors are out there. Physical dvds have redbox. VOD's have wal mart amazon. It is my sincere opinion after doing a research project that netflix's survivability will need heavy advertising to gain customers and providing ease of use and establishing a stronger firm brand. Netflix should steer cleer of cutting prices because they would not stand a chance with a price war against wal mart. stumbled upon this article as i looked for the actual stock price netflix did the buy back. Currently 70 dollars so i know netflix made a lot of money. They should take advantage and redistribute some of their stocks.

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