Blockbuster BBI

From: "Ahunawar Chhapgar" Date: Sun Feb 26, 2006 3:40 pm Subject: Blockbuster (BBI): Might be way undervalued

Carl Icahn bought BBI in the 8 to 10 dollars range. Carl Icahn is a
billionaire investor who buys companies when he thinks that he can run them
operationally and likes to break down companies after buying into them or as
in this case, try to replace management that pays themselves too well after
doing a shoddy job of running the company.

Some fundamental analysis on the stock:
1. Revenues: around 6 Bil / year; Market cap: 719 Mil. This should
definitely catch anyone's attention. Of course this means that they are a
loss making company which is why this discrepancy.
2. Total liabilities = 2.56 Bil and Total Assets = 3.03 Bil (they own their
stores). The difference in this has gone down since the previous quarter but
you still have about a +$500 Mil difference. In the meantime the stock is
down by about a third in value.
3. Their online rentals have not picked up like Netflix. Round 1 goes to
Netflix. BBI took the beating of it's life to get to $3.75 from the 10 to 11
dollars range. Having said that, BBI has more distribution centers than
Netflix and if they can do a half decent job of trying to run the business,
they would be much more successful with Blockbuster Online.

What is Icahn doing to turnaround business.
1. Classify stores as profitable or loss making and close down the loss
making stores. BBI has thousands of stores in the country.
2. Use the extra time he had over the last 18 months to develop a good
Inventory management system and make BBI online successful.
Five years from now DVD's will probably be replaced. Don't be so sure though
cause studios are making a lot of money via DVDs and unless they find an
alternate source of the same revenue, they are surely creating DVDs.
One very interesting observation is that there are 81000 $5 calls open for
April. How big is the anomaly? Get this. Every call / put for all the months
has an open interest in between 500 - 2000. This means some one is betting
8.1 million shares on the fact that BBI will cross $5 by April options
expiry. The option is at 10 cents and a pretty good bet in my opinion.

The recovery might take longer than one would like. So you could still see a
March 9 earnings report that is not good enough but hey this one is quite
undervalued

Cheers,
Ahu