With a new installed CEO Jim Keyes, blockbuster seems to have found its way back. The turnaround strategy is working and the results showed. It now has 2 consecutive profitable quarters. However its stock (at today’s close $3.17) is still languishing in the $3 range, the very same range last year when the company was still bleeding money. That doesn’t seem right.

There are some reasons that I believe blockbuster stock should be in the $4.5 -$5 range (a 50% increase in value). First of all, Blockbuster possesses an unmatched competitive advantage through its multi-point distribution plan that offer content... in-store rent, by mail rent, online download (thru movielink), DVD kiosks download through flash [memory] cards (currently on trial at some store locations)

Second, cost saving and improved logistics. Keyes is no stranger to cost saving. As a former CEO of 7-eleven, he knows how to squeeze cost out of the retail operation. Under his leadership 7-eleven stock tripled. He will be able to do the same here with blockbuster. Look at the $100 million cost saving in the first quarter of 2008 as a proof. More savings to come, although I believe the number won’t be that big.

Third, Blockbuster online movie rent, Total Access, is now profitable. This is big news, considering that last year this online movie rent was bleeding a lot of money and probably the reason that made BBI stock tanked in the first place. It now has stable around 3.1 million subscribers and is getting back to growth again.
Domestic same-store revenues increased 2.9 percent as compared with the first quarter of 2007. This increase was driven by a 0.4 percent growth in same-store rental revenues and a 19.7 percent increase in same-store merchandise sales.
For comparison Netflix has forward P/E ratio of 20 and Blockbuster P/E ratio is only 10. Clearly there is some room for advancement here.

Fourth, Renewed focus on game rental, selling game and game consoles, also selling some electronics devices (e.g. portable media player, blue-ray player, hi-def TV). Blockbuster spent one-third of its capex in the first quarter of 2008 to beef up its game inventory alone. This will definitely increase store traffic and revenue.
Moreover blockbuster recently started a trial of a new concept store dubbed “rock the block” in Dallas, Texas. This is not a video rental store but really more like an entertainment stores with a lounge where customer can sit on a sofa, relaxed and watch movie trailer or try new games in hi-def television home theater, or download digital content and sip free coffee.

Fifth, less competition due to the bankruptcy of rival Movie Gallery and Hollywood Video. Both rivals have shut 950 stores in the US leaving them with only 3,490 stores compare to blockbuster’s 4,800 stores. This will bring increase traffic and revenue to the blockbuster’s stores short term, at least until the end of 2008.

Sixth, Keyes has all the incentive to make this work. He has bought 3 million of blockbuster stock at average price of $4.35. Another investor, Carl Icahn, blockbuster largest shareholders last year bought at $3.7 pps. Surely as a billionaire investor he has some financial whiz doing all the calculation and concluded that at $3.7 per share BBI is a bargain.

With all of these reasons, $4.5 - $5 pps range in the next 12 months is very possible. This is an undervalued stock that has an attractive risk/reward opportunity, … worth to consider.....