If you recall the product life cycle from business classes, products and services can typically be categorized into one of five development stages: development, introduction, growth, maturity, and decline. For Blockbuster
First, a quick recap of fourth-quarter and 2005 full-year results reported on March 9. Overall revenue fell 11% in the quarter and about 3% for the year. This was primarily attributed to the elimination of charging late fees on rentals. Excluding late fees, overall rental revenue was actually up as Blockbuster continues to ramp its online movie rental service (which had 1.2 million subscribers at the end of 2005). Blockbuster's Game Rush store-within-a-store concept helped hike video game sales up about 25%. However, the company lost $3.20 per share for the full year as it transitions its business model. Management provided a 2006 business outlook: While not providing specific earnings or revenue guidance, the company stated that it plans to reduce SG&A by $100 million and cut capital expenditures by about $50 million, since it will be opening fewer stores than in 2005.
Foolish investors are well aware that the market can be irrationally exuberant or excessively pessimistic on a company's prospects at any time. In my opinion, investors are currently overshooting on the downside in regards to Blockbuster. Sure, the traditional business model is somewhat of a mess as management tries to stem losses from the elimination of late fees and weak retail comps. But bankruptcy concerns have diminished since the company successfully raised $150 million in a convertible preferred offering, reported positive free cash flow again in Q4 2005, and gained a handle on retail operations. If it can at least stabilize rental revenue at its store base and continue to grow its online rental business, the shares should recover. As a quick comparison, the shares are currently trading at 0.12 times sales and 1.52 times book value. Shares of rival and Motley Fool Stock Advisor pick Netflix
Overall, it's currently difficult to place a more specific valuation on shares of Blockbuster. However, I believe there's still potential for the retail business; high-definition DVDs are just around the corner, and the buying/selling of new and used DVDs and video games is quite lucrative. The online rental business is currently in a development/growth life cycle phase, and it will take longer than expected before technology and a successful business model are developed to support the viewing and downloading of videos and video games from the information superhighway. Finally, there is some appeal to being able to occasionally head to the local video shop and pick out a movie. This is something Netflix cannot offer, while Blockbuster is offering in-store coupons to online subscribers. Shares of Blockbuster are not for the faint of heart, but if management successfully navigates current turbulence, shareholders could be duly rewarded with this value play.
Are you interested in other great value stocks at bargain-basement prices? Take Motley Fool Inside Value for a 30-day free spin.
Fool contributor Ryan Fuhrmann is long shares of Blockbuster, but he still subscribes to Netflix since his queue is in excess of 100 flicks. Feel free to email him to talk stocks or discuss your favorite movie.