Movies make us laugh and cry in good economic times and in bad. Film companies are well-respected staples of our society, but they should not enjoy all of the entertainment glory. The companies that bring movies into our homes and onto our television and laptop screens play an increasingly important role in society, too. And that's where Blockbuster (NYSE:BBI) and Netflix (Nasdaq:NFLX) fit in.

A Reel Beginning
Blockbuster's origins in the movie rental business go back to the 1980s, a time when mom-and-pop rental chains dotted the landscape. Viacom (NYSE:VIA) purchased the company in 1994. In 1999, Blockbuster went public and the rest, as they say, "is history". Blockbuster expanded its locations and offered new services that would lead it to dominate the video rental world in much the same way that Starbucks (Nasdaq:SBUX) has dominated the coffee business. But Blockbuster is not alone anymore.

Enter Red Envelope Entertainment
The extinction of mom-and-pop chains did not amount to a competition-free environment for Blockbuster. Online video renter, Netflix, threw its hat into the video rental ring in 1998.

Since it went public in 2002, Netflix's little red envelopes have held a special place in the hearts of U.S. movie lovers. However, with the intention of defeating rental giant Blockbuster, Netflix began to lower its prices. Blockbuster retaliated by offering discount coupons and, finally, by providing, in addition to its traditional bricks-and-mortar rental option, a "clicks-and-mortar" solution that can be found at Blockbuster.com.

Blockbuster Or Stock Bust Quarter?
Blockbuster recently released earnings results for the third quarter ended October 5. The Texas-based video rental company posted a net loss of $17.8 million, or 11 cents per share, which is a significant improvement over the $34.4 million, or 20 cents per share loss that it reported for the same period last year. Thus, excluding items, its 8 cents per share loss is far better than the 15 cents per share loss the Street had been expecting. (Uncover the real story behind one-time charges at The One-Time Expense Warning.)

Blockbuster's domestic same-store sales rose a healthy 5.1% - an amazing feat in today's turbulent economic climate. In addition, the company reduced selling, general and administrative (SG&A) costs, but the percentage of overall revenue came down, too. During the third quarter, SG&A costs constituted 50.5% of sales, whereas these costs comprised 51% of sales for the same period last year. The Street and the average investor might interpret this information to mean that Blockbuster stock has some upside. However, several quarters could pass before the company meets or beats expectations or for Wall Street enthusiasm to return. Of course, the stock price would have to go up for this stock to be met with any real interest. Currently trading around $1 per share, some analysts or investors may be scared off. $5 or higher could be a different story, though. (To learn more about the retail sector, read Analyzing Retail Stocks.)

Estimates are currently at 17 cents for 2008 and 32 cents for 2009. (Read more about earnings guidance at Can Earnings Guidance Accurately Predict the Future?.)

Blockbuster's chief competitor is worth a look, however. Presently, Netflix trades at over $21 per share, or approximately 16.9 times the current year's estimate of $1.29 per share. At over $20, Netflix shares do not come cheap. However, many investors prefer to buy shares of a company that trade higher and have good market position, rather than jump into a stock that trades at a little over $1, like Blockbuster.

Bottom Line
Netflix and Blockbuster both have done a terrific job of delivering movies to consumers. While Blockbuster has the bigger potential for gains at this point, higher returns come with greater risk. Therefore, proceed with caution.

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Tickers in this Article: BBI, SBUX, NFLX, VIA

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