ARGUS Maintains 'Sell' Rating on Blockbuster (BBI)

August 22, 2008 11:43 AM EDT

ARGUS maintains a 'Sell' rating on Blockbuster Inc. (NYSE: BBI).

ARGUS analyst says, "We believe the company will have difficulty improving margins and growing earnings in the face of strong competition and a difficult macro environment. Looking down the income statement, we see little opportunity to boost EPS beyond our modest projections. At the top line, acceleration in revenue growth appears unlikely in the fiercely competitive video rental industry, which includes new entrants Red Box and Apple in addition to Blockbuster's main rival, Netflix. Competition will also likely prevent the company from selling higher-margin products. Cost savings from reduced advertising will end in 3Q08, and management is likely to find it difficult to further reduce G&A spending. We are also concerned about the 13% sequential increase in inventory in the second quarter; the company may be hoping that it can increase turnover, but we are concerned that it will need to lower prices or increase promotions. Finally, another way to boost EPS is to take on more leverage and buy back stock to reduce the share count, but the company's debt is rated below investment grade and its earnings yield is low."

Blockbuster Inc. (Blockbuster) is a global provider of rental and retail movie and game entertainment, with over 7,800 stores in the United States, its territories and 21 other countries as of January 6, 2008.

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