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Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: Drew Fossum X-To: Lorna Brennan X-cc: X-bcc: X-Folder: \Drew_Fossum_Dec2000_June2001_1\Notes Folders\All documents X-Origin: FOSSUM-D X-FileName: dfossum.nsf Thanks. DF ET & S Business Intelligence Department From: Lorna Brennan on 09/20/2000 03:44 PM To: Drew Fossum/ET&S/Enron@ENRON cc: Subject: Article in WSJ: "Movies-on-Demand May Finally Turn Blockbuster's Stock into a Hit" Drew, This was in today's WSJ, but I don't see anything prior to that that isn't a month old or more on the Blockbuster deal. There was an announcement on the wires on September 6 dealing with the n-Cube technology that will be used in the Blockbuster deal. Let me know if this is it! Lorna ----------------------------------------------------- 09/20/2000 The Wall Street Journal Texas Journal T2 (Copyright © 2000, Dow Jones & Company, Inc.) Blockbuster hasn't enjoyed a great market reception. In fact, it has fared so poorly since going public 13 months ago that today you can pick up a share of the Dallas video-rental giant for the price of a video rental and a couple of late fees. But analysts who have promoted the stock from its initial public offering in August 1999 say now is a better time than ever to bet on Blockbuster. They say the company is poised to capitalize both on its ubiquitous stores and the emerging market for delivering movies over the Internet. "There are a lot of factors that make it incredibly attractive," says Patrick J. O'Hare, an analyst in Chicago with briefing.com, an online market-analysis firm. For starters, Blockbuster, with 5,000 blue-and-yellow stores in the U.S. alone, is the leading video retailer and one of the country's best-known brand names. Its stock, which closed yesterday at $9.188, looks inexpensive. Blockbuster is also moving beyond its storefronts. In July, Blockbuster signed a 20-year agreement to sell movies over the growing broadband network being built by Houston-based Enron. There's more. Mr. O'Hare notes that the company's earnings are expected to grow at a 20% annual clip over the next five years, while the stock trades at a relatively inexpensive 14 times earnings. In 2001, the company's earnings are projected to grow by 28%. So by one measure, Blockbuster trades for about half that rate. The stock also trades for less than one third of its book value. Of course, the stock price has been depressed for a long time, ever since majority owner Viacom sold 18% of Blockbuster in an IPO. (New York-based Viacom plans to distribute the rest to its shareholders, but is waiting for the price to rise.) Blockbuster ended its first day of trading at $15, its offering price. It went down from there and bottomed out at $8.88 on June 27. Not even a better-than-expected second-quarter financial report on Aug. 2 helped much. The company lost 16 cents a share, compared with a 28-cent net loss a year earlier. Excluding losses from new-media initiatives, such as development of its Blockbuster.com Web site, it posted cash earnings of $24.1 million, or 14 cents a share, which beat analysts' expectations. Analysts say the news will improve, with a consensus estimate that Blockbuster will earn 64 cents a share before charges this year. The company also expects its market share to reach at least 35% this year, four times that of its nearest competitor, Hollywood Entertainment's Hollywood Video. It adds up to rosy projections. Briefing.com's Mr. O'Hare says the stock could double in the next 12 to 18 months. Salomon Smith Barney analyst David Riedel in New York has a $26 target price, also in 12 to 18 months. (Mr. Riedel's firm was an underwriter for Blockbuster's IPO.) So why has the stock languished? One culprit is the new-media initiatives, which are obscuring the company's profits elsewhere. And, as Blockbuster Chief Executive John Antioco noted recently when warning that third-quarter revenue would be slow, there have been few recent big hits among the new video releases. Mr. Antioco also acknowledges there may be confusion over how well Blockbuster is mixing its traditional retail business with the advent of movies-on-demand and other new-media ventures. Indeed, for all Blockbuster's talk about new media, it doesn't yet deliver movies electronically and customers still can't do things like reserve movies by using Blockbuster.com. Thus far, customers can do little more than buy videos and digital videodisks on the Web site. "Perhaps the story may be more complicated than some people have time for," Mr. Antioco says. "People who buy retail stocks don't fully understand our story, and people who buy media stocks may not totally understand the transition." In the end, the company will be a mix of new media and traditional retailing. But until that picture becomes clearer, the result, Mr. Antioco says, "is the stock malaise." But Mr. Antioco says Blockbuster is now in an ideal position. The company has delivered solid earnings from its core video-store business and has struck potentially big deals to bring movies to consumers in their homes. "Blockbuster, as a pure retail play, has done what it said it's going to do," Mr. Antioco says. "Now we have several [new-media] plays beyond that." Indeed, just this year Blockbuster has entered into five deals to supplement its in-store rentals through showings of movies on outlets such as DirecTV, a unit of Hughes Electronics, El Segundo, Calif. The agreement with the most potential, analysts say, is the Enron deal, in which Blockbuster will distribute movies over the energy giant's broadband network to set-top boxes in consumers' homes. Mr. Antioco says Blockbuster will be delivering movies in a couple of markets served by Enron's network by the end of the year and predicts that will be just a prelude to a wider rollout in 2001. Certainly, there are potential stumbling blocks. To make the deal work, Enron and Blockbuster need digital-subscriber-line providers to step up enrollment and solve the spotty service and technical glitches that have plagued large numbers of users. "The issue for Blockbuster is going to be availability," says Mike Goodman, a senior analyst with Yankee Group, a market-research firm in Boston. Yankee projects there will be 1.45 million DSL users by the end of this year, increasing to about 8.4 million in 2004. That's a substantial number of subscribers, but it's also just a potential customer base for Blockbuster. Mr. Antioco says the digital future is a ways off -- it may be 10 years before revenue from electronic delivery of movies catches up with video-store revenue. Even the beginning of the DSL-dependent rollout will take up to a couple of years, according to Forrester Research of Cambridge, Mass. It says movies won't be delivered to more than a few markets until sometime in 2002 -- not 2001, as Blockbuster predicts. But Mr. Antioco says agreements with the regional phone companies that provide DSL will bear fruit sooner and that the company will soon announce other partners such as a maker of the set-top boxes needed to order movies. Briefing.com's Mr. O'Hare argues that now is the time to buy because Blockbuster's stock could move fast once investors grasp the possibilities of the company's plan for multimedia distribution. Both Mr. O'Hare and Salomon Smith Barney's Mr. Riedel classify Blockbuster as particularly risky but say the company's outside-the-store initiatives should serve as a catalyst for the stock over the next 18 or so months. Mr. O'Hare says that time frame may not be compatible with investors' "notion of instant gratification." But, he says, "it's worth it in this case."
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