This is a stock where the consensus is currently making a number of mistakes. First, it's a mistake to price this business based on its 2005 price-to-earnings ratio. (It currently sells at 11 times estimated earnings per share of 85 cents.) Sort through expense data and you'll see all sorts of one-time outlays -- for example, completing the buildout of DVD trading and game businesses.
By my calculations, this business can generate $1.60 or more in annual cash earnings after 2005. Also, skilled analysts should be able to see that in the online business Blockbuster has a clear structural advantage over the competition, including Wal-Mart (WMT - commentary - Cramer's Take) and Netflix (NFLX - commentary - Cramer's Take). By offering online subscribers two free coupons that can be redeemed at 9,000 stores, Blockbuster is the effective price leader by more than 50%. And those coupons have created incremental store traffic resulting in additional sales and rentals.
In Sum...
If you simply take consensus perceptions at face value, you're going to be an average stock-picker. But you have a chance to be a great stock-picker if you think through consensus beliefs and develop your own original analysis in an attempt to see what others don't see: that J.C. Penney is not impossible to turn around, that a conservative Commerce should have a big mortgage securities portfolio with the high rate of deposit growth, or that Blockbuster's EPS potential is north of $1.60 per share and that it will be the clear winner in the online business.
P.S. Will you be there when Cramer makes his next move?
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At time of publication, Alsin and/or ACM was long Commerce Bancorp and Blockbuster, although holdings can change at any time.
Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor and portfolio manager of The Turnaround Fund, a no-load mutual fund. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback and invites you to send it to arne.alsin@thestreet.com.
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