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When economists in years hence write the history books, I believe that they'll mark 2009 as the year Blockbuster (NYSE: BBI ) went bust.
You heard me right. This Fool just went out on a limb and predicted that Blockbuster is going to zero. Which will, in the spirit of this series, make it the worst-performing stock of 2009.
Our economy is in crisis, Fools. No great news there. Apple (Nasdaq: AAPL ) just reported flat earnings. Starbucks (Nasdaq: SBUX ) and Bed Bath & Beyond (Nasdaq: BBBY ) have both reported profit declines four quarters in a row; Home Depot (NYSE: HD ) and Lowe's (NYSE: LOW ) have done likewise, and for longer. Everywhere you look, our consumer-driven economy is falling apart, and retailers have taken the brunt of the damage.
Which brings us to Blockbuster. At first glance, you might think BB's the king of the retail space; in each of the past four quarters, it's reported better numbers than in the previous year's analog. Lower losses when it loses, higher profits when it wins. But I submit to you that this analysis misses the point.
By the numbers? No. Sell these numbers
In the big picture, Blockbuster is a mess. This video purveyor has lost money in seven of the last 10 quarters -- a combined loss of $1.15 per share, or nearly as much as the shares are currently worth. Over that same timespan, the company has not generated a penny's worth of cash profit. To the contrary, it's burned through some $130 million in cash, shrinking the size of its bank account to just $95 million. Worse still, things are getting ... well, worse. More than half of that cash burn has taken place since last January.
As a result, despite Blockbuster's heroic efforts to pay down its debt, its balance sheet still looks incredibly lopsided. Opposite a tiny pile of cash, the company remains $615 million in the hole for long-term debt, and it's issued preferred stock essentially amounting to an additional $150 million in long-term obligations -- $765 million in total, or more than eight times its cash on hand.
2009: The year things really got bad
As our economy slouches toward Gomorrah, interest rates have tumbled into the cellar. Even so, Blockbuster currently has to divert half of its operating profit just to pay off its creditors. And things could go from bad to worse this year. As I look at Blockbuster's balance sheet, I see $200 million in long-term debt coming due this year, and I ask myself: What will Blockbuster pay it with?
As I already mentioned, the company's got less than $100 million in cash on hand. Accounts receivable amount to even less than that. Combined, these short-term assets don't add up to sufficient cash to pay the piper. It seems to me that Blockbuster will have to roll over a big chunk of debt this year -- and if you haven't noticed, banks aren't particularly eager to lend hundred-million-dollar sums right now. Which leads me to believe that Blockbuster is facing a liquidity crisis.
Don't look now, but ...
One final point before I close. Good sportsmanship suggests that it's not nice to kick a guy when he's down. Good corporate stewardship, in contrast, tells us that this is in fact the safest time to kick him. That brings us from Blockbuster to archrival Netflix (Nasdaq: NFLX ) , which yesterday reported an utterly stunning fourth-quarter profit.
Blockbuster stumbles into this Year of the Greater Depression bearing a balance sheet loaded with too much debt, not enough cash, and negative free cash flow that adds to the former as it depletes the latter. Meanwhile, Blockbuster's most ardent foe stands poised on a hillock of nearly $300 million in cash and short-term investments, with no debt to speak of.
Now, I don't pretend to read Netflix CEO Reed Hastings' mind. I don't know whether he'd like to own the DVDs-by-mail space, or if he really believes that keeping Blockbuster in the race helps to validate the concept. In short, I don't know whether he will cut his company's prices so low as to make his rival's business model unviable, and finish off the undead zombie I see in Blockbuster.
I am convinced, however, that if Netflix is sufficiently ruthless, this is the year to do it.
If you agree that Blockbuster is the worst stock for 2009, then leave a comment below that rates Blockbuster an "underperform." Or feel free to bet against me and leave a positive comment below.