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Net Flix, Inc. - A Wax Ink Raw Value Update

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May 09, 2009 – Comments (0) | RELATED TICKERS: NFLX , WMT

Company Thoughts

With more than 10 million subscribers, Netflix, Inc. (Nasdaq: NFLX) is the largest online movie rental subscription service in the United States, offering a variety of subscription plans, with no due dates, no late fees, no shipping fees and no pay-per-view fees. They provide subscribers access to over 100,000 DVD and Blu-ray titles plus more than 12,000 streaming content choices.

Not only is the company in the movie rental business, Wax Ink has discovered a very mysterious, "covert" side to the company. A side that perhaps management was completely unaware of, but, according to "wanna be" postal sleuth Norman Baccash, allegedly exists.

According to allegations made by realtor Norman Baccash, it seems the company, perhaps under cover of darkness perhaps not, attempted to save on postage by falsely certifying that the company's DVD mailers qualified as machinable under the mailing standards of the United States Postal Service and thereby avoiding $260 million in surcharges for non-machinable mail.

That the company would do this has apparently taken its toll on Mr. Baccash who is seeking monetary relief in the amount of three times the damages suffered by the United States, civil penalties of between $5,500 and $11,000 for each violation of the Act, a monetary award pursuant to the Act, injunctive relief and costs.

If the Mr. Baccash can pull this off, he should be at least nominated for an Oscar.

More Company Thoughts

Additionally, in February 2009, a number of purported anti-trust class action suits were filed against the company and Walmart, Inc. (NYSE: WMT) alleging that Netflix and Wal-Mart entered into an agreement to divide the markets for sales and online rentals of DVDs in the United States, which resulted in higher Netflix subscription prices.

The complaints assert violation of federal and/or state antitrust laws and seek injunctive relief, costs (including attorneys’ fees) and damages in an unspecified amount. Attorneys' fees! Who would have thought?

There are some other lawsuits highlighted in the company's most recent SEC Form 10-K filing for fiscal year ending December 31, 2008, as filed with the SEC on February 25, 2009. Just scroll down to Note 5 in the Notes to Consolidated Financial Statements section of the filing for more information.

Investment Thoughts

I have the company on my watch list with a Reasonable Value Estimate of $39.00, a Buy Target of $19.50, a First Sell Target of $38.00, and a Close Target of $41. However, given the following reasons, I have lowered my Buy Target from $19.50 to $12.00.

While I was glad to see the company end fiscal 2008 with an almost 11% increase in Operating Revenue over fiscal 2007, there were a few things I found very troubling, especially considering today's economic climate.

The things I found most noteworthy were the company's almost 27% decline in Cash, its drop in Marketable Securities by almost 32%, the elimination of $132.5 million of Intangibles, the 25% increase in Operating Cash Flow year over year, as most importantly to us, the 400% drop in year over year Free Cash Flow.

To me, these are significant changes in financial health, and were I a shareholder, which I am not, I would be very concerned.

But to show that my investment philosophy is shared by an extremely small group of investors, I note that the company's PE stood at 9 at the end of fiscal 2007, 13 at the end of fiscal 2008, and now with the current economic thud in full swing, I see that the company's tailing twelve month PE is near 18.

Final Thoughts

While the company may earn its money renting make believe, I believe at current levels, an investment in this company will not any money make.

Wax

Netflix Worksheet 1208.pdf

Netflix Worksheet 1207.pdf

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