How Low Can This Stock Go?

These days, there's no shortage of stocks that make you wonder, "How low can this stock go?" That's a good question, because it seems like no matter how far some stocks fall, they end up falling even further. With that in mind, this week let's take a look at a company that was once a staple on the American consumer's entertainment landscape: Blockbuster (NYSE: BBI  ) .

A choice selection … of competitors
I guess I'm dating myself when I say I remember when a weekend trip to the video store -- most likely Blockbuster -- was the thing to do. (Yes, I remember renting movies on videotape, too.) I don't miss that weird ritual of slowly sidestepping along the new release wall with a ton of other people trying to snap up the last copy of some hit movie.

Times have changed in the movie rental business, now that Netflix (Nasdaq: NFLX  ) has made Blockbuster's bricks-and-mortar model look like a downright dinosaur.

In addition, you can now can rent movies digitally through Apple's (Nasdaq: AAPL  ) iTunes or Amazon.com's (Nasdaq: AMZN  ) Unbox. (Or you can use Amazon Unbox for TiVo (Nasdaq: TIVO  ) .) You can go to one of those Redbox kiosks in many grocery stores and rent a flick. I've even noticed that my local 7-Eleven seems to offer those lovely, legendary one-use, self-destructing DVDs, joining convenience with an utter lack of commitment to any service (or even DVD return, or concern about needless waste, for that matter). Apparently Staples (Nasdaq: SPLS  ) is offering them, too.

Regardless of what you think about any of those alternatives, there are a ton of options, and more to come in the digital arena. And that's why Blockbuster's in trouble, and will continue to be in trouble, as far as I'm concerned.

A history of complacence
This tough competitive landscape set Blockbuster up for what I thought was one of the most bizarre business news headlines ever: its proposed merger with Circuit City (NYSE: CC  ) . (You probably already know that the company dropped that idea.)

Blockbuster has former 7-Eleven executive Jim Keyes at the helm now, and I'll admit that he seems like a savvy addition. He has generated some interesting new strategies for the company, including digital delivery and peddling movie-friendly extras in stores.

All the same, Blockbuster has a history of shooting itself in the foot, and I suspect many people still feel burned by the company's former behavior. Netflix's recent shipping snafus may have given it a bit of a black eye, but clearly, it has learned Blockbuster's lessons well. Netflix automatically offered 15% credits to customers, stating in a humble and apologetic email how it strives to delight them (and turning sour grapes into fine wine).

Compare that with the way Blockbuster made onerous late fees part of its business model, before Netflix came on the scene and shook things up. After effectively milking its customers for years, angering many along the way, it'll take a long time for Blockbuster to regain customer loyalty.

Debt albatross
I have long marked Blockbuster as an "underperform" in Motley Fool CAPS. I recently wondered whether I needed to end the pick, which was winning; after all, shares were only trading in the $3 range. How much lower can it go?, I thought.

Then news broke that Moody's was cutting Blockbuster's "probability of default" rating to Caa1 from B3, saying it "remains highly leveraged and is faced with the burden of refinancing in a challenging credit environment." To me, that indicated that things could indeed get worse.

After all, investors who snap up shares of Blockbuster, even at these beaten-down prices, are also investing in a company that has only reported an annual profit once since 2004, and has a major debt burden, with a total debt-to-equity ratio of 1.25 and a debt-to-capital ratio of 0.56. That's above and beyond normal competitive challenges, so no thanks.

Scary stuff
Granted, Blockbuster is expected to report an actual annual profit this year and in 2009, but given the lackluster economy and the major competitive challenges, I'm not sure I buy the idea that things are turning around for Blockbuster anytime soon.

Therefore, even though Blockbuster's trading at just a couple bucks per share, I still say "Look out below!" And my Foolish colleague Rick Munarriz coined another apt phrase for this retailer way back in 2004, playing off its old marketing mantra: "Make it a Blockbuster fright." Even now, I still find the company just as frightening.

Staples, Netflix, Amazon.com, and Apple are Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletters today, free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (8)

Comments from our Foolish Readers

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  • Report this Comment On August 22, 2008, at 2:16 PM, kmick wrote:

    I dont think BBI is a dinosaur....I think you need to get your facts straight. BBI offers movies by mail, retail store, and are even expanding to vending machines. Keyes has a vision for this company and even had the guts to try to buyout CC. Yesterday the company announced its partnering with Yahoo and Intel for some widget launch. BBI is not a dinosaur and has enough brand equity and clout to take on NFLX. I think people don't think of BBI as a growth stock since its been around so long and it doesn't have the sexiness of NFLX. NFLX doesn't have high operating expenses...I get it.....but some people enjoy the retail experience and it will only provide better exposure for their mail and vending machine dispensing. Go BBI! I'm with Icahn!

  • Report this Comment On August 22, 2008, at 2:42 PM, kmick wrote:

    Ok in defense of BBI.

    Book value per share is 2.69!!

    Current Ratio is 1.12! This means BBI can finance itsliabilities -

    That is a better measure than Debt to Equity ratio - Especially when their shares are way undervalued....lower the equity higher the debt ratio. This was a $4-5 stock not too long ago. That would drastically reduce the debt ratio.

    I cannot believe you are bashing this stock when this is actually one stock you should definitely buy at these levels!!

    Try FNM or FRE next time...lol.

  • Report this Comment On August 22, 2008, at 5:19 PM, joerosenberg wrote:

    Netflix is the innovator, Blockbuster is a dinosaur. The Netflix Roku Box obviates the need for cable TV. My wife and I switched from Blockbuster to NetFlix/Roku and cancelled our cable TV. But, Roku needs to offer adult videos, or it will risk being a prudish dinosaur as well. Otherwise the Vudu box is worth the extra cost, and may win just like VHS beat Betamax. It would be nice for us to get our adult stuff from SugarDVD.com via Roku & Netflix instead of the postman!

  • Report this Comment On August 22, 2008, at 5:40 PM, TMFJoeInvestor wrote:

    kmick,

    The current ratio is only relevant insofar as we're talking about present obligations. This is a sinking ship with serious debt obligations. According to CapitalIQ, they didn't make enough in operating profit to cover their interest payments in 2005, 2006, or 2007. That's a *pretty* serious problem.

    I hate to be such a Debbie Downer on a Friday evening, but I can't imagine why long-term focused investor would touch these shares. And on that note, have a great weekend!

  • Report this Comment On August 26, 2008, at 12:37 PM, kevincstms wrote:

    Blockbuster is the "Pacific Stereo" of the last century. All of us here in California remember the slow demise of that once great store chain. Blockbuster is looking the same these days. All the indications are there. They have an unsupportable debt load, an out of date marketing plan and stores that are looking rather shabby these days. Of the four stores within driving distance of my house (Orange County, Ca.), all of them are dirty and dated looking. The first indication the public has of a store in trouble is the dirty carpets and fading signs. If BBI Mgmt. really is interested in a turnaround they should start with what folks see first. And as far as the comments about BBI getting into a Netflix type marketing all I can say is: "Too little, too late". They were late to adopt that marketing strategy and now they are paying for it. BBI was once a great chain of stores, now they are just waiting around for the inevitable liquidation.

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