Blockbuster Case Analysis
Point of View
The group decided to view this case as potential investor of Blockbuster Entertainment Corporation
Case Context
Blockbuster Entertainment Corporation reported posted earnings in 1998 of $15,498,000 on revenues of $136,893,000. This resulted into a net income per common and common share equivalent of $.58 earnings per share. (Exhibit 2) A closer look at figures posted for the periods ending 1997 end 1996 would show a dramatic increase in revenues and its equivalent earnings per share.
As the corporation was holding its annual stockholders meeting on May 9, 1998, Bear, Stearns and Co., an independent accounting firm, issued a report critical of Blockbuster Corporation’s accounting suggesting that the company’s stock was grossly overvalued. According to Lee J. Seidler, if not for the corporation’s unique strategy of using cash combined with disputable accounting practices, the company would have had only $.07 earnings per share in 1998. (Exhibit 6 Table 1)
In response to the report, Blockbuster Corporation’s shares plunged $3.375 a share to $30 1/8 on May 9, falling even further by $3.875 to close at $261/4 on May 10.
Problem Definition
“In view of the reported gross overvaluation of shares, is it sensible to buy shares of stock of Blockbuster Corporation or not?”
Description of Framework for Analysis
In examining the facts of the case of Blockbuster Entertainment Corporation as a potential investor, Group 3 is concerned with determining the veracity of the critical analysis of the Bear, Stearn’s and Co in relation the company’s financial statements and financial strategy, in particularly the usage of accounting methods of the company as to goodwill amortization and depreciation amortization of hit tapes and its effect on the company’s reported earnings per share (EPS).
In addition, the company’s cash flows from operating and financing activities are appraised as to ascertain the company’s capacity to generate cash.
The group decided to view this case as potential investor of Blockbuster Entertainment Corporation
Case Context
Blockbuster Entertainment Corporation reported posted earnings in 1998 of $15,498,000 on revenues of $136,893,000. This resulted into a net income per common and common share equivalent of $.58 earnings per share. (Exhibit 2) A closer look at figures posted for the periods ending 1997 end 1996 would show a dramatic increase in revenues and its equivalent earnings per share.
As the corporation was holding its annual stockholders meeting on May 9, 1998, Bear, Stearns and Co., an independent accounting firm, issued a report critical of Blockbuster Corporation’s accounting suggesting that the company’s stock was grossly overvalued. According to Lee J. Seidler, if not for the corporation’s unique strategy of using cash combined with disputable accounting practices, the company would have had only $.07 earnings per share in 1998. (Exhibit 6 Table 1)
In response to the report, Blockbuster Corporation’s shares plunged $3.375 a share to $30 1/8 on May 9, falling even further by $3.875 to close at $261/4 on May 10.
Problem Definition
“In view of the reported gross overvaluation of shares, is it sensible to buy shares of stock of Blockbuster Corporation or not?”
Description of Framework for Analysis
In examining the facts of the case of Blockbuster Entertainment Corporation as a potential investor, Group 3 is concerned with determining the veracity of the critical analysis of the Bear, Stearn’s and Co in relation the company’s financial statements and financial strategy, in particularly the usage of accounting methods of the company as to goodwill amortization and depreciation amortization of hit tapes and its effect on the company’s reported earnings per share (EPS).
In addition, the company’s cash flows from operating and financing activities are appraised as to ascertain the company’s capacity to generate cash.