Term Paper on "Blockbuster Financials"

Term Paper 7 pages (2012 words) Sources: 5 Style: MLA

[EXCERPT] . . . .

BBI as of Nov 13, 2006 12:38 PM (Taken from Quote Data)

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Buy or Sell Recommendations

Sell. This recommendation is based on several factors that make the investment in this stock unattractive. One of the factors that contribute to the sell recommendation is the industry that Blockbuster operates within. This industry is extremely volatile and has received a great deal of competition from cable and satellite companies that offer video on demand. The company also had a significant Net Loss for year ending 2005.

This combined with the fact that the company's Beta is 1.2 which means that the company's stock is more volatile than the general market. This Beta score in and of itself is not necessarily a bad thing; after all many stocks that carry this same beta are very attractive.

It is this beta combined with the aforementioned factors that make the stock unattractive.

This sell recommendation is also made because blockbuster has a poor credit rating and may have difficulty paying off its debts. Although Blockbuster may see some improvements in the condition of the company as a result of its new venture, Total Access, these improvements may not be substantial enough to warrant holding on to this particular stock.

Abbreviated Financial Statements (Annual)

Income Statement (Taken From "Income Statement from Blockbuster")

PERIOD ENDING

31-Dec-05

31-Dec-04

Total Revenue

Cost of Revenue

Gross Profit

Research Development

Selling General and Administrative

Non-Recurring

Total Operating Expenses

Operating Income or Loss

Total Other Income/Expenses Net

Earnings Before Interest And Taxes

Interest Expense

Income Before Tax

Income Tax Expense

Minority Interest

Net Income From Continuing Ops

Discontinued Operations

Extraordinary Items

Effect Of Accounting Changes

Other Items

Net Income

Preferred Stock And Other Adjustments

Net Income Applicable To Common Shares

Balance Sheet (Taken from "Balance Sheet for Blockbuster")

PERIOD ENDING

31-Dec-05

31-Dec-04

Cash And Cash Equivalents

Short-Term Investments

Net Receivables

Inventory

Other Current Assets

Total Current Assets

Long-Term Investments

Property Plant and Equipment

Goodwill

Intangible Assets

Accumulated Amortization

Other Assets

Deferred Long-Term Asset Charges

Total Assets

Accounts Payable

Short/Current Long-Term Debt

Other Current Liabilities

Total Current Liabilities

Long-Term Debt

Other Liabilities

Deferred Long-Term Liability Charges

Minority Interest

Negative Goodwill

Total Liabilities

Misc Stocks Options Warrants

Redeemable Preferred Stock

Preferred Stock

Common Stock

Retained Earnings

Treasury Stock

Capital Surplus

Other Stockholder Equity

Total Stockholder Equity

Net Tangible Assets

Cash Flow (All Numbers in thousands)("Taken From Cash Flow for Blockbuster")

PERIOD ENDING

31-Dec-05

31-Dec-04

Net Income

Operating Activities, Cash Flows Provided By or Used In Depreciation

Adjustments To Net Income

Changes In Accounts Receivables

Changes In Liabilities

Changes In Inventories

Changes In Other Operating Activities

Total Cash Flow From Operating Activities

Investing Activities, Cash Flows Provided By or Used In Capital Expenditures

Investments

Other Cashflows from Investing Activities

Total Cash Flows From Investing Activities

Financing Activities, Cash Flows Provided By or Used In Dividends Paid

Sale Purchase of Stock

Net Borrowings

Other Cash Flows from Financing Activities

Total Cash Flows From Financing Activities

Effect Of Exchange Rate Changes

Change In Cash and Cash Equivalents

Ratio Analysis

Liquidity Ratios

Quick Ratio=Current Assets-Inventory

Current Liabilities

Quick Ratio=1,423,800-785,800 =

Quick Ratio=.48

Current Ratio= Current Assets

Current Liabilities

Current Ratio=1.08

Profitability Ratios

Gross Profit Margin= Sales-Cost of Goods Sold

Sales

Gross Profit Margin=1,586,500-1,235,200

Gross Profit Margin=.22

Return on Assets=Net Income

Total Assets

Return on Equity=Net Income

Shareholder Equity

Blockbusters Return on Assets and Return of equity for the year ending 2005 are not applicable because the company experienced a negative net income or a net loss of $588.1

Leverage Ratio

Debt to Equity Ratio=Short-Term Debt + Long-Term Debt

Total Share Holders Equity

Debt to Equity Ratio= 36,400 + 1,121,600

Debt to Equity Ratio=1.83

Stock Price Ratios

P/E Ratio=Market Value Per Share

Earnings Per Share

P/E Ratio= $4.73

P/E Ratio=16.89

Debt Rating/Credit Rating and Estimated Yield

The Standard & Poors Debt Rating for Blockbuster as of November 2005 was B-. The B. rating indicates that the company will have difficulty paying back its debt. In addition the minus sign indicates that this condition is likely to remain the same.

Beta or other measures of Systematic risks

The company's Beta is 1.2 (Key Statistics). Beta is the tendency of a security's returns to react to changes in the market (Beta). Beta is calculated through regression analysis. The author further explains that beta of 1 indicates that the security's price will move with the market. A beta less than 1 means that the security will be less volatile than the market. A beta greater than 1 indicates that the security's price will be more volatile than the market. For example, if a stock's beta is 1.2 it's theoretically 20% more volatile than the market (Beta)."

Discussion of the Industry

Blockbuster is a member of the movie and video store industry. This industry is inclusive of Movie Gallery Inc., Hastings, Trans World entertainment and Netflix. The movie and video store industry has faced a great deal of challenge particularly as it relates to the increased affordability of DVD's and the prevalence of piracy. Netflix and Blockbuster have established a slight advantage over other companies because they both operate on the internet and provide customers with convenient options that allow them to keep the product for a substantial period of time without charging them a late fee. In addition, it appears that Blockbuster may have a slight advantage over Netflix because it also has traditional stores in addition to the internet. In addition, it has name brand recognition.

According to the company's annual report this industry is home video game industry, of which Blockbuster is a part, is particularly volatile. The report explains that the industry is extremely cyclical and have higher price points than do DVD's. The report also points out Game software sales in the United States decreased from approximately $6.2 billion in 2004 to approximately $6.1 billion in 2005. We expect game software sales to continue to decline during 2006. This reflects the cyclical nature of the home video game industry, which has traditionally been affected by changing technology, limited hardware and software lifecycles, frequent introduction of new products and the popularity, price and timing of new hardware platforms and software titles. The home video game industry typically grows with the introduction of new hardware platforms and games..."

Discussion of the Company

Blockbuster Inc. was founded in 1982 and its headquarters is in Dallas Texas. Blockbuster has long been a fixture in the American video rental industry. Today, the company operates in America and around the world (Profile of Blockbuster Inc.). Blockbuster and its franchises specialize in maintaining entertainment related stores in America and abroad (Profile of Blockbuster Inc.). The entertainment related products that the company offers include prerecorded videos, and video games for in-store rental. The company also offers movies and games for sale and trade, and sells other entertainment-related products (Profile of Blockbuster Inc.). The company operates in the home video and home video game industries (Profile of Blockbuster Inc.). These industries are inclusive of in-home movie, including television series, theatrical movie, and direct-to-video product; in addition to the game entertainment offered by online retailers, retail outlets, and cable companies (Profile of Blockbuster Inc.). The company also has an online service offering rental of movies that are sent via the mail (Profile of Blockbuster Inc.).

According to the company's annual report (2005) it faces significant challenges related to changes in movie rental habits (Annual Report 2005). The annual report points out that blockbuster faces significant competition from internet suppliers, the availability of low cost DVD's. piracy, movie on demand provided via cable and satellite and the increased number of people that now have digital recorders.

List of Major Events

The only major event that occurred was the announcement of Total Access. According to Blockbuster's official press release Total Access will allow "online renters unprecedented access to movies through the introduction of BLOCKBUSTER Total Access™, a movie rental program that gives online customers the option of returning their DVDs through the mail or exchanging them at more than 5,000 participating BLOCKBUSTER® stores for free in-store movie rentals (Block Buster Launches...2006)."

The press release explains that total access is unique because renters do not have to wait to receive DVD's through the mail (Block Buster Launches...2006). Instead they can exchange them at stores. This allows customers to increase the number of DVD's that can be rented each month. In addition, it gives Blockbuster an advantage over the competition because they do not have traditional stores and as a result they can not offer such a service (Block Buster Launches...2006).

In addition to this feature, the Blockbuster Total Access also allows subscribers a shipping cycle that is faster. Once a subscriber returns their online rentals to a Blockbuster store, the next movie that the subscriber wants to rent automatically. This means that total Access customers will receive their online movie(s) a day earlier than if they had returned the movies through the… READ MORE

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