May 27, 2009 - Netflix, Inc. (NFLX-NASDAQ) provides online movie rental subscription services in the United States. The company offers its subscribers access to a library of movie, television, and other filmed entertainment titles on digital versatile disc (DVD). Its members can get DVDs delivered to their homes and can instantly watch movies and TV episodes streamed to their TVs and PCs.

Over the last 5 years, revenues grew by 34% a year, on average while earnings per share (eps) improved by 22% a year, on average. Over the next 5 years, analysts see growth of 15.5% a year for sales and eps increases of 18% per year. Not bad numbers for an economy that has done nothing but shrink for the last 18 months.

Sales went from $996.7 million in 2006 to $1.3647 billion last year. This year the consensus from 20 analysts is for $1.66 billion, then $1.94 billion next year. The range for this year's estimate is $1.64 billion to $1.69 billion. For next year, between $1.82 billion and $2.03 billion.

Earnings went from 71 cents in 2006, to 92 cents in 2007, then hit $1.34 last year. Analysts see eps of $1.72 this year (with a range of $1.61 to $1.85) and for next year, $2.08 (with a range of $1.82 to $2.37). Second quarter results (ending June 30) are predicted at 50 cents compared to 42 cents last year, then in third quarter 45 cents compared to 33 cents last year.

The customer base continues to grow with an increase of about 25% over the last 12 months. In the first quarter, subscriber acquisition costs were down thanks to a weak advertising environment; profit margins increased; and eps were up 75%. Look for customers to keep coming as the economy forces consumers to cut back on more expensive forms of entertainment. While Netflix's Blu-ray discs saw an increase in price, the regular DVD's are still a real bargain when compared to movies at a theatre. Internet delivery is relatively new but gaining in popularity. This format should be a major growth driver in the future.

There's plenty of cash here at $286 million. That's almost $5 a share. There's no debt on the books. The company has been using some of its cash to buy back stock, spending close to $43 million in the first quarter alone. The company will most likely continue buying, helping the eps for some time to come.

Of course, it's not a clear view of the future for NFLX. There's plenty of competition, such as Blockbuster, and other companies with streaming online movies and TV shows capabilities. But NFLX has plenty of resources to be an industry leader and has shown its willingness to invest in R&D to exploit the technology.

More numbers: Market Cap is $2.31 billion. Forward P/E is 19. Price to book is 6.77. For the last 12 months, operating margin was 10% with Profit margin at 6.43%. Return on equity was a remarkable 26%. Current ratio is 1.61. Book Value per share is $5.92. There are 57.7 million shares outstanding with a float of 46.39 million. Insiders own 18.53%.

The stock price has been quite a roller coaster. In 2008, it peaked at $40.90, then cracked to $17.90 in the October/November meltdown. Now it's climbed back to $40 but has been at $50 in April of this year, an all-time high (stock prices reflect a 2 for 1 split in early 2004).

There's a lot of good going for this stock, and it hasn't been lost on investors. The valuation is rather high. But so are the positives: very high return on equity, lots of cash, no debt, good growth in sales and earnings with prospects of even better numbers ahead. NFLX is the kind of stock you'll want to follow and if it takes another break, it could qualify for many portfolios.

Company Web site: www.netflix.com

- Ted Allrich