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For Speculative Friday, Cramer is back on board with Blockbuster [BBI
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], a dangerous little stock but one that has potential for big gains.
Cramer has credibility on BBI. He got behind the stock in November 2006 and then put it in the Sell Block in January 2007 for a 48% gain. Then he gave up on it entirely two months later when former CEO John Antioco left for a cool 56% gain since his first call.
BBI beat nicely on its earnings this week but the stock got taken down anyway. Cramer sees that as an opportunity.
The big risk here is the worry that the company might not be able to meet the terms of its loan covenants – the special terms that require the company to make a certain amount of earnings before interest, taxes, depreciation and amortization (EBITDA). If it doesn’t make $250 million in EBITDA this year then it defaults on its loans and its creditors will tear the company to shreds. Management says it should deliver above the EBITDA levels, but not by much.
Compare that to the potential reward. The company beat on earnings because of a big turnaround led by James Keyes, the former CEO of 7-11. He’s focused on cutting costs, raising prices and generating more retail sales at Blockbuster stores. His strategy is essentially to make Blockbuster more than just a movie rental place – he wants it to be where people go to buy, not rent, movies, shows and games.
BBI also gets a leg up because its biggest brick-and-mortar competitor, Movie Gallery, recently filed for bankruptcy. It now has the chance to come in and grab some of that market share. And a crumbling economy works in BBI’s favor too, as people are less likely to shell out $12 for a movie ticket and more likely to go rent one for a lot less.
Cramer believes the good outweighs the bad here (watch the video for his in-depth analysis of the risk-reward). As long as it’s approached with caution, he thinks it’s time to come back to BBI.
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