Our more detailed report analysis is available, but the Coinstar thesis summary is as follows:
Coinstar (CSTR) is a relatively consensus short name for funds and investors who focus on dying industry/"fade" names. Despite the negative sentiment surrounding the company, the stock price has held in fairly nicely through 2012 and with good reason. Until last quarter, the company was growing its core business on a same-store sales basis and still trading at an attractive EBITDA multiple.
We think 2013 will be a year for this short to finally pan out for a few key reasons:
- Consumers and competitors are becoming more adept at and comfortable sourcing their movies through the Internet. This is reflected in the degradation of Coinstar's transactions per movie kiosk over the past few quarters.
- Management has proven to be horrible allocators of capital, preferring to spend their cash on high-spec concepts, questionable acquisitions and the new streaming deal with Verizon (VZ) vs. paying a dividend or buying back stock in company that trades at an attractive multiple.
- The new deal with Verizon could be a real drain on cash and margins in its current form as they try and compete with established players like Netflix (NFLX) and Amazon (AMZN).
- The company's CEO just "retired" but it looks more like he was forced out. Given the amount of change the company is going through, it seems like a strange time to change leadership unless those changes aren't going well.
Coinstar is a provider of automated retail solutions in the United States and Canada. The company operates two main product lines:
- Redbox: an automated DVD kiosk that offers consumers the chance to rent DVDs and video games.
- Coin: an automated coin-counting kiosk solution that allows consumers to feed loose change into the kiosks and receive vouchers that either a) allow a customer to receive cash back or b) are store value credits. The customers that elect the store value credit get to keep a higher percentage of the value of the contributed coins.
The company is also working on a couple of new ventures / projects:
- The most important of which is the joint venture that they just formed with Verizon to compete with Netflix. The joint venture is called Redbox Instant, and will offer a combination of physical disk rental nights and streaming content.
- The next concept the company has developed and is rolling out is an automated coffee kiosk product that will offer Seattle's Best Coffee.
- Finally, the company has just rolled out a Redbox Tickets product that will allow it to sell tickets to live events for $1 above face value.
Overview of Key Value Drivers:
1. The DVD market may be declining slowly - for now. However, when it goes, it will go quickly and the business trends are pointing towards an inflection point.
2. Management has proven to be, at best, a questionable allocator of capital.
3. Content deals are becoming increasingly contentious, and expensive.
4. The new streaming deal could be bad for margins.
Our base case for Coinstar is $33. This DCF-derived price target assumes the following assumptions:
- 2013 transactions per unit decline at a rate of 5%.
- 2014 transactions per unit decline at a rate of 10%.
- 2015 & 2016 see a per kiosk decline of 40%.
- Pricing and cost per rental stay constant.
- 5% decline in volume.
- The company earns $45 million of new venture EBITDA over that time.
- $30 million in capex.
- Zero credit for Verizon Streaming venture (either negative or positive).