S&P, Moody's grow more upbeat on Blockbuster

Posted Sep 17th 2009 12:20PM by Elizabeth Harrow
Filed under: Analyst Upgrades and Downgrades, Netflix, Inc. (NFLX), Blockbuster Inc 'A' (BBI)

Late Wednesday, Blockbuster Inc. (NYSE: BBI) scored a ratings upgrade from Standard & Poor's. The ratings agency raised Blockbuster's corporate credit rating from "CCC" to "B-" with a stable outlook. S&P commented, "The stable outlook reflects our belief that liquidity will remain adequate over the near term despite continued operational weakness and moderate deterioration of the company's credit protection metrics."

S&P's new rating is still six notches into junk territory, but the upgrade is nevertheless a vote of confidence in Blockbuster's refinancing efforts. On Monday, the video rental firm announced plans to offer up to $340 million in senior secured notes due 2014, and yesterday, Blockbuster said it would close up to 40% of its brick-and-mortar stores during the next two years.

Moody's is also impressed that Blockbuster appears to be pulling itself up by the proverbial bootstraps. Shortly after the S&P upgrade, Moody's said it was placing Blockbuster's ratings on review for a possible upgrade. In a statement, the ratings agency said that the successful closure of Blockbuster's note offering "would strengthen the company's capital structure and address key constraints to its liquidity."

BBI rallied more than 12% Thursday in the wake of these positive comments, tagging an intraday peak of $1.54 at last check. The stock has climbed higher along support at its 10-day and 20-day moving averages since late August.

Considering the stiff competition Blockbuster faces -- not just from Netflix (NASDAQ: NFLX), but from smaller upstarts such as Redbox -- plenty of bearish bets have been levied against the one-time titan of movie rentals. As a result, the stock is well-positioned to benefit from good news, including Wednesday's upgrade. Short interest currently accounts for 16.7% of the stock's float, and it would take 4.2 days at BBI's average daily trading volume for all of these shorted shares to be covered.

Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the video series Schaeffer's Daily Q&A on SchaeffersResearch.com.

Tags: BBI, Blockbuster, credit ratings, inthenews, Moodys, Netflix, NFLX, note offering, short interest, Standard Poors, store closures, technical analysis