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I want you to treat this little $2 number as a lottery ticket, but with better odds...

I've got real credibility, when it comes to BBI...   I've made you money in it, and I've stopped you from losing money in it...

I had total confidence in their terrific former CEO, John Antioco... So, I got behind his stock on November 6th of 2006...   BBI was at $4.42...  Then it moved up.  I put it in the Sell Block on January 25th of 2007 at $6.57, a 48% gain.

And then we gave up on the stock entirely, and told you to absolutely leave every single share... March 22nd of 2007, when Antioco left.  The stock was at $6.91.

So, I got you up 56%.   I talked to you about how bad I did in Annaly (NLY*), so let me give you a little bone there about what I did in BBI...

In a business where you're only as good as your last trade - and mine is Annaly (NLY*) - it doesn't make me a genius, but it does make me a bit of a seer, when it comes to BBI...

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Since then, the stock has fallen apart...  But, after spending a year in the wilderness, thanks to its high debt load, poor management, and tough competition from Netflix (NFLX), not to mention video on demand, now movie rentals on iTunes... there's reason to think that BBI has finally turned the corner, and not because of the Citigroup upgrade today which, frankly, didn't move the stock at all...  It was still down...

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BBI reported earnings yesterday, and it gave us 26 cents of earnings per share.  The Street was only looking for 18 cents...

The stock actually went down after the report and, when I saw that, I thought... opportunity.

And I was all worried all day... I said, aw... Citi recommending it... watch this stock move up without me, and I'm going to have to say, oops, we missed it... because I expected the stock to go higher...

The market was so bad yesterday and today though... you've got a chance... you've got a chance to be able to buy this for less than you would have paid before the better-than-expected quarter.  It rarely happens...

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Now, before I sing the praises of BBI's great quarter and its turnaround, I want you to know the risk...

Remember my new rule in Stay Mad For Life, my rule is...  amateurs focus on how much money they can make in a stock...  pros focus on how much they can lose...   Be a pro.  The big worry about BBI is that it might not be able to meet the terms of its loan covenants.  These are special terms that are tacked onto the loans that, in the case of BBI, require the company to make at least a certain amount of earnings before interest, taxes, depreciation and amortization... also known as EBITDA.

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If BBI doesn't cross that threshold in 2008... they need $250 million in EBITDA... then BBI is default on the loans, just as if it hadn't make it's payments... and the creditors get to tear the company - and your stock - to pieces.

It's a real worry.  Even though management says BBI should deliver $290 to $310 million in the EBITDA for 2008, a $50 million margin is a little close for comfort...

But what else did you expect?  It's a speculative stock...
 

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One last word, though, before you confuse this with Annaly (NLY*)...

BBI is paying down debt, not borrowing more of it...  It had a great pay-down this quarter.  If BBI weren't reducing its debt, then there's no way I would endorse it, even as a speculative play...

This stock does not violate the Annaly rule.   Remember, Annaly was borrowing, or "levering up", to use a fancy word...  BBI is de-leveraging... another piece of Wall Street jibberish for paying down debt...

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Enough about risk.  How about some reward?...

You want to know how BBI beat yesterday, and how they can do it again?...

The potential turnaround here hinges on a new management team, by James Keys, who just might be the next Antioco...   Keyes came from 7-Eleven, where he toiled for 21 years, spending the last five as CEO...

Now he's focused on cutting costs, getting rid of unprofitable customers by raising prices, and generating more retail sales... he's selling more movies.

His turnaround strategy is to make Blockbuster more than just a movie rental place.  He wants Blockbuster to be where people go to buy, not rent, movies... shows, games, you name it...

BBI is also benefiting from the disintegration of its biggest brick and mortar competitor, The Movie Gallery, which filed for bankruptcy in October, when it also said it would close 500 stores...

Here's a great chance for BBI to come in and take share...

Plus, according to BBI's new CEO, our crumbling economy is also a positive...  because it makes people less likely to shell out $11 bucks for a new movie ticket, and more likely to resign themselves to renting a new movie from Blockbuster, for a lot less...

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In a world where people are no longer buying expensive stores like Saks Inc. (SKS) and, instead, are lining up to shop at Wal-Mart (WMT), which I call the world's biggest soup kitchen, without the ambiance... the CEO's reasoning seems to make sense...

Of course, when everyone has video-on-demand at home, BBI's probably not a great buy, but that's a long way away... 

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You've heard the good and the bad.  Now it's time to weigh them...

What's the risk/reward?...

Turnaround works?...  And I think BBI deserves to trade at a 20% discount to Netflix (NFLX), on an enterprise value... meaning it would get a 6x multiple on enterprise value to EBITDA...  In other words, I think it goes to $5.

If it doesn't, I think that BBI could trade 3.5x enterprise value over EBITDA... a 53% discount... In other words, $1.72.

With BBI trading at $2.72, this is an up $2.30 stock, or a down a dollar stock, right?...  

Another way to put it...  you could lose 37%, or gain 84%...  and that's my kind of risk/reward.

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And, with Carl Icahn a big shareholder here and, remember, he's made us a lot of money in the past, Motorola (MOT) excepted...  I'm much more confident he can hold management's feet to the fire, and make sure the right things get done.

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The Bottom Line!:      Here's the bottom line, guys... If you're a speculator, do some work over the weekend.  Take a look at the Citigroup (C) report too, if you disagree with me...  I think it's time to come back to Blockbuster Inc. (BBI).

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