Wanna Rent a Movie? Probably Not

Not too long ago, I talked about the structural weakness in the video rental business given the surfacing of on-line rental businesses such as Netflix Inc. (NASDAQ/NFLX) and growing cable video services such as Video on Demand. For rental chain companies like Blockbuster Inc. (NYSE/BBI) and Movie Gallery Inc. (NASDAQ/MOVI), these are desperate times.

 Remember when Blockbuster lost a heated battle with rival Movie Gallery for the ownership of Hollywood Entertainment last April? I was wondering why anyone would want to grow their video rental business at a time when the industry was undergoing major structural changes. For Blockbuster, the situation turned out to be a saving grace when it lost the bid — otherwise it could be in very serious financial difficulty today. Even so, the world’s largest video rental chain is suffering.

 There is increased speculation that Blockbuster may be on the verge of defaulting on payments to movie studios, although the company’s chairman and CEO John Antioco disputed this in an interview with the Wall Street Journal, but did add that the movie rental business “is in the tank.” Not exactly a vote of confidence for a company that is in the business. This is clearly a message for investors to jump ship. The shares of Blockbuster fell to a new 52-week low of $4.30 on Monday — its lowest level in over five years. The market-cap is now a mere $877 million.

 From large-cap powerhouse to small-cap speculative stock, Blockbuster has its work cut out for it. According to a report in the Wall Street Journal, Universal Pictures, owned by General Electric Co. (NYSE/GE), is concerned about the financial state of Blockbuster also. Blockbuster has weak working capital, and it’s weighted down by $1.24 billion in debt and only $138.70 million in cash.

 Blockbuster has already told shareholders that it will not pay out its third quarter dividend of $0.02 to save the company about $3.40 million. In my view, this is not a good sign. So, if you own Blockbuster, you may want to seriously dump the stock, as its prognosis may be terminal. The industry as a whole is suffering. Even the on-line rental outfits will face pricing pressures.