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In this article
My love-hate relationship with online and retail video rental companies…
Reliving the battle between mid-cap video rental companies Blockbuster and Netflix…
A Small-Cap stock alternative to Blockbuster and Netflix that's below $5 per share…

Retail Stocks: Video and Internet Rentals

I have to admit, I've been extremely lazy recently.

Ever since I found out that most of the movies I'm interested in seeing are offered On-Demand for a fee of $3.99 per movie courtesy of Comcast digital cable, I've hardly needed to order online or rent movies from a storefront.

Once in a while there is a movie that I want to see, so I jump in the car, fumble around for my rental card, and peruse the new releases for a half- hour, trying to find something other than what I went there for. This was my Saturday night: hovering over the Blockbuster desk waiting for an extremely popular new release to be returned so I had first dibs on it.

Ok, I admit: I'm a video stalker.

I've had a love-hate relationship with video rentals. I loved Netflix when it first came out, especially since the distribution center is located here in Maryland, so it only takes a day to receive the next movie on your queue.

I loved it until I was mailed three DVDs in a row that were scratched and glitchy. It's tough when you have to rely on other “do-gooder” renters to check the appropriate box on the DVD sleeve when they return it that says “scratched” or “damaged.”

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I also had a fascination with Hollywood Video for a while, because they had great deals on buying used DVDs. But then I found out that my Hollywood Video card only worked at the store at which I signed up for the card.

What a terrible business plan.

Retail Stocks: Blockbuster versus Netflix

I started reliving my love-hate relationship with video game rentals when I heard today that Blockbuster CEO and Chairman of the Board John Antioco was planning to step down from his post by the end of 2007. This is due to a fight over bonus compensation, partly with billionaire investor Carl Icahn who holds 10% of Blockbuster Inc. (BBI:NYSE) stock.

It was finally agreed that Antioco will receive compensation to the tune of $3.1 million for 2006, down drastically from what he says he's entitled to, which is $7.7 million.

If you remember, about a year ago, there was a rift between Netflix and Blockbuster: Netflix Inc. (NFLX:NASDAQ) sued Blockbuster in a patent infringement lawsuit, claiming that Blockbuster was “illegally copying its ideas” by expanding its rental business to the Internet.

Blockbuster, under John Antioco, therefore launched Total Access, a program that melded online video rentals with store video rentals for one basic fee.

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Blockbuster itself isn't much of a “blockbuster” stock. It only has a profit margin of 0.99%, with quarterly year-over-year growth of -28.30%, and its debt is three times that of its cash in pocket.

There have been rumors that the company is looking at digital downloading as a new consumer video option, and has even gone so far as to be in talks with Movielink, a movie downloading service, to buy it for $50 million in cash and stock.

Neither company has commented on this “rumor” or whether it's verifiable.

Blockbuster's most recent earnings statement at the end of February showed the company at a loss of 28% for the fourth quarter, due to store closures that funded the money toward the launch of its Total Access program.

Regardless, the company's stock has been on a tear in recent years, as I give it my “Trendbuster” status award. Since October, the stock has put on gains of 77%.

Of course, it's down today by almost forty cents on the news that Antioco could be leaving.

I would look for news that the company may be taken private, as there seems to be a trend toward this. (Perhaps Icahn wants to take a bat at it?) Additionally, aside from the Blockbuster/Movielink rumor, we may see more mergers and acquisitions in the video movie rental area as a whole, as companies in many industries are looking toward inorganic growth strategies to increase their profits.

Retail Stocks: A Small-Cap Alternative in the Video Industry

If I were you, I would keep Blockbuster Inc. (BBI:NYSE) on your radar screen.

As far as the music and video store industry goes, Netflix Inc. (NFLX:NASDAQ) is a terrible investment. And that's not just because of my personal vendetta against the company. The stock stinks, down 28% since October.

I'd keep an eye on Movie Gallery Inc. (MOVI:NASDAQ). The company's stock is less than $5 per share in a rising trend. Granted its return on equity is -988% and its profit margin is -21%. I'm not telling you to buy it, just keep it on your ticker.

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Specifically, MOVI is planning its own online video rental service, with a pilot program in place for mid- to late 2007. The company has already bought an on-demand digital movie company called MovieBeam (so it's beaten Blockbuster to the punch!) and also has 74 movie kiosks in public places, which it expects to expand by 200 more in 2007.

Also, MOVI posted a loss of only 47 cents per share, compared to a whopping $17.25 per share loss in the fourth quarter a year ago, due to a previous charge on goodwill (or the intangible asset value of brand names, patents, research and development, customer loyalty, etc.)

MOVI is definitely worth watching as a pull-forward stock as Netflix and perhaps Blockbuster continue to flounder.

***

Ann Sosnowski is a small and mid-cap stock analyst for Taipan Financial News. She is the editor of Diligent Investor, a monthly newsletter that balances conservative and moderately risky investments that pertain to current market trends. She is also the editor of Diligent Investor Micro-Cap Hot Sheet, a monthly newsletter that finds the hottest penny and micro-cap stocks on the market.

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Related Links
Retail Stocks: The Merger of Sirius and XM Satellite Radio could prove detrimental to consumers.
Retail Sector: There's a false buy signal on retail as a whole…
Retail Stocks: Same-store sales are the strongest leg that retailers have to stand on…

Related Sources
Retail Companies: The National Retail Federation is “The Voice of Retail Worldwide.”
Retail Stocks: Blockbuster fast racks CEO John Antioco's exit. - BusinessWeek
Retail Stocks: Learn more about small-cap company Movie Gallery Inc. (MOVI:NASDAQ).