Checklist Investor Stock Blog

Blockbuster has called a halt to their price war by increasing the price of the total access program by $7 per month. Netflix should follow suit with a several dollar per month hike.

For the past several years, Netflix has been running at break even (on a cash basis..they have shown a profit, but this is because they are not depreciating their DVDs at the same rate that they buy them, which is what BBI and MOVI do).

It is time to see how many people will subscribe to Netflix at a higher price point. They currently spend 50 million per quarter just to keep their subscriber count the same (they loose 1 million subs per quarter…they report a 5% month churn, which is 15%  per quarter, which is 15% of 7 million, which equals 1 million. Their cost per new sub is about $50, hence the 50 million per quarter just to stay even.
I wonder how many will quit at a 21.99 per month price?

Note - if Netflix does raise their price, you can bet the BBI will match the raise and price their “online only” program the same.

Unprofitable growth means nothing. The purpose of a business is to make a fair return. Netflix raise your prices, and your stock price will follow.

The 1Q 2007 conference call Netflix had with analysts was quite interesting. Never before had I heard a competitor mentioned by name in a call so often. Repeadly Netflix discussed Blockbuster, and even gave an estimate of how much money BBI is loosing on their ‘Total Access’ program!

It is sort of funny that Netflix is complaining about a price war that they started 1.5 years ago! They were quite happy being the low price high growth side, but now that they are being under cut, the situtation is a little different!

Anyway, both BBI and NFLX should come to their senses and raise their subscription prices. A price war does no one any good, except consumers, who have been getting a discounted ride for quite some time.

It will be interesting to see if the NFLX predictions of a 200 million dollar loss for 2007 due to Total Access comes true…stay tuned, BBI reports May 2nd!

Don’t forget to read the 10Q of the companies that you follow. And listen to their quarterly conference calls. As a stock holder, you are a partial owner of the business. Treat these quarterly reports as an update to you on how the business is doing.

Stocks have done quite well over the past few months.  Have you stocks kept up? It doesn’t really matter if they have, since short term fluctuations should not matter to you. But of course, the worst feeling is when the market is up and you are not! Its tough to overcome, but the ability to do so is a common trait of an independent investor.

Over the past 2 days, Movie Gallery has risen 30% on very high volume and no news. Wonder whats going on? 2 theories. First, any mutual fund that started buying would cause such a rise as this, sinc the float is so small. Second, MOVI reports their cash flow and projections to the bank group once per month….its quite possible that the figures leaked out from the bank. Remeber, it was the bank group that leaked out the early results of the 2005 4th quarter.

Note that the 4th quarter should be really good for MOVI in the sense that the titles released to video have a much higher box office take. Same store sales should be up quite a bit. If they are, then the debate over why they dropped in the first place will be over…it was the content.

Our Stock of the month for October is Yahoo.  With the stock at a 2.5 year low, it is a bargain for those with a long term outlook. What do you think?

What a horrible morning last Thursday! There is nothing worse than when you expect one thing, and get just the opposite. I had expected 2Q results from MOVI that would be significantly better than expectations, but instead the results were significantly worse! Ouch! The stock dropped over 50% on the day.
An analysis of the 2Q results shows some positive and negative news. On the negative side:

1. Same store sales at the Hollywood division were down almost 8%. A shockingly high number.

2. The company loss .48 per share.

3. The company hired a firm to help them with re-structuring.

4. The company’s debt load remains very high, and they will have to re-negotiate their debt ratios in March.

5. The forecast for the 3Q implied more poor results, and probably a big loss.

6. If the studios restrict their credit further, they could start into a downward spiral where they cant bring in enough product to sell, so sales are lower, as is profit, which causes further credit tightening…this is the path to bankruptcy.

On the positive side:

1. The Movie Gallery stores showed a positive comp of 1%. If Hollywood had shown those same comps, the stock would be up several dollars, not down several dollars.

2. Over the last 12 months, the company has added 115 million in value to the business. This can be primarily seen in the reduction in Accounts Payable by 100 million [check the companys balance sheet on the earnings report]. A-EBIDTA is 260 million, and interest expense is about 120 million. This leaves 140 million for Cap-Ex and AP/Debt reduction. (Cap-Ex is 35 million).

3. They have indicated that the studios will support them. Either way, their account payables are down 100 million from one year ago.

4. The 4Q results should be much better. Movie theater attendance was up in the 2Q by 6%, and is up so far in the 3Q. These movies hit DVD in the 4Q.

A big question is why the results on the Hollywood stores was so much different than the Movie Gallery stores?? In the past there has been some differences in the results, but not this large. The only thing I can think of that could be the culprit is that Movie Gallery cut back on the amount of product it brought into the Hollywood stores. This would have been done to ensure that their EBIDTA was as high as possible so that they would meet their credit ratios (which they did, easily). If this is the case, it could be seen as a positive, since it is a correctable situation (assuming that they have the credit available to bring in the product). Note that purchases of product was way down in the quarter as compared to prior quarters.

So, where does the company (and stock price) go from here? There are 2 arguments that can be made, 1 for a bankruptcy and 1 for a huge turnaround. Both scenarios have evidence to back them up, and the proponents of each can make a good case for each. However, investors have to decide which argument will come true for themselves.

The true test will come in the 4Q. Same store sales should definitely be up. MOVI has said all along that things will pick up when better product comes along, and it is arriving in the 4Q (as shown by the increase in movie theater attendance). If same store sales are not up, then there is a fundamental shift away from rental, and the company is in deep trouble.

One of our past stock of the month selections, Movie Gallery, will announce earnings around Aug 11th. The analysts estimate earnings to come in at .08 per share. I however, am estimating about $1.00 per share…This is a huge difference in opinion!

I’m basing my analysis on the superb 1Q results MOVI posted ($1.27 in earnings per share). Based on information from Rentrak, I expect sales results to be better than the 1Q (as compared to the quarter last year). This would mean same store sales would be flat or down less than they were in the 1Q. I expect MOVI ability to match costs with revenue to have similar success as the 1Q.
Over the past 3 months, the consesnus estimate has increased from a loss of .08 to a profit of .08. I believe that the analyst community is hesitant to significantly increase their estimates until MOVI can show that the 1Q results were not a “fluke”. This gives the investor a great opportunity, if you have confidence in your analysis, to buy a stock at a bargain.

On a valuation note, companies generally sell for between 6-10X the A-EBIDTA to enterprise value. At a 5.00 price, MOVIs enterprise value is about 1,265 (Debt outstanding + market cap). With a trailing EBIDTA of 265 million, this ratio is 4.77. However, over the next several quarters, MOVI A-EBIDTA will increase quite a bit. I’m projecting 400 million for 2006. In addition, I expect MOVI to pay down 150 million in debt. This would make MOVI CURRENT ratio (based on current stock price), and forward looking projections, to be 1076 / 400 = 2.69. A very low number.

In addition, I expect MOVI to earn around $4.00 per share for 2006. Note that they will not be paying any taxes for the next few years, so if you calculate the earnings as if they paid taxes, it is around 2.40 per share.  Give the company a P/E ratio of 10, and the stock is trading for $24.00 per share.

Learning about retailers can be very profitable. Retailers with no debt, positive same store sales, and room for expansion have good futures. In general, once a concept is proven, it can be expanded nationally. Our July stock of the month fits into this category.

If you have any comments about our July stock of the month report, please post them here.

I know you are busy, and I know its hard! But before investing in a stock, try writing a report similar to our ‘Stock of the Month’ report. For every stock you own, you should be able to explain, in detail, why you own it. And just saying “because I think its going to go up”, is not a good answer. By writing down your detailed reasons for buying, you have a historical document to review when it comes time to sell. Many investing strategies say you should sell when your reasons for buying are no longer valid. But, if you don’t document your reasons for buying, then you can’t know when to sell.

Teachers will tell you the best way to learn about something is to teach it. You will force yourself to learn the details about a company by writing about it (and letting a few others read it).