Declining sales make Blockbuster Entertainment less than attractive

Answering the mail

August 07, 1991|By Andrew Leckey | Andrew Leckey,Tribune Media Services

Q. We're thinking of buying 10 shares of Blockbuster Entertainment. Its stores seem to be on every corner. Though 10 shares isn't a lot, we want to be careful with our retirement dollars.

A.This flashy company isn't receiving rave reviews anymore.

Don't buy shares of Blockbuster Entertainment (around $10 a share, New York Stock Exchange), the big video rental chain which both owns and franchises stores, for company growth has been slowing since 1989, said David Presson, analyst with Edward D. Jones & Co.

For example, average monthly sales of its company-owned stores, up 35 percent in 1988, rose just 8 percent in 1989 and 7.5 percent in 1990. This declining trend is likely to continue, Presson believes.

"The novelty of owning a videocassette recorder has dimmed because 75 percent of U.S. households own them, so the video rental business should be consistent but not robust," explained Presson, who also notes that Blockbuster is now a bigger business and has a harder time making a profit with growing expenses. "There are better investments than Blockbuster, especially if you have to be careful with your money."

Q. I would like your professional opinion on Colgate-Palmolive Co. I'm a novice investor with a small nest egg.

A. Buy shares of Colgate-Palmolive (around $40, NYSE), the pTC household personal-care and food-product firm, because it has been making positive moves in recent years, advised Deepak Raj, analyst with Merrill Lynch & Co.

The company restructured in the 1980s to get rid of non-core businesses. It has been aggressive with its overseas operations, and, as a result, only 10 percent of sales are domestic.

"Though Colgate-Palmolive has faced a tough economy and stiff competition, especially in the U.S. from Procter & Gamble, Colgate-Palmolive earnings have stayed on track," noted Raj, who considers the stock good for both short- and long-term investors. "Earnings should continue to do well, growing 13 to 15 percent annually."

Q. I purchased 150 shares of Allied-Signal and, because of aerospace cutbacks, I'm considering selling. Should I?

A. Give it some time.

Hold your shares of Allied-Signal Inc. (around $38, NYSE), a firm in aerospace, chemicals and electronics, because it's restructuring and has new management, said Paul Nisbet, analyst with Prudential-Bache Securities.

The company has undergone changes the past five years, especially with acquisitions of Bendix and Allied Aerospace. Aerospace now constitutes more than 40 percent of overall sales. It is also a big supplier to the auto industry, another area hard hit.

"Wait to see what will be done in the restructuring," said Nisbet. "I'm concerned that it might mean a cut in dividend that would negatively impact the stock price."

Q. I am not very happy with my 36-share investment in Federal Express. What should I do?

A. The stock of this freight and package-forwarding company isn't getting anywhere fast.

Stock in Federal Express (around $43, NYSE) hasn't been worth buying for the past two years, said David Guthrie, analyst with Morgan Keegan & Co.

International losses are the big worry, continuing to drain the company's bottom line. Guthrie won't recommend purchase of the shares until some sign of long-term improvement is apparent.

"In addition, the purchase of Tiger International has been a nightmare for the company," said Guthrie. "That isn't likely to improve in the near-term future either."

Q. I recently purchased a design company for which I'd done independent consulting. I don't know whether I should go on the payroll or simply continue to pay myself as I have done in the past, as an independent contractor and consultant.

A. If you're devoting full-time hours to this business, the IRS requires that you be treated as an employee rather than an independent contractor, said Barbara Pope, tax partner with Price Waterhouse.

"This has been an area that the IRS has been auditing closely in recent years," explained Pope. "There could be severe penalties for the company for failing to withhold taxes properly."

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