In its fiscal fourth quarter and full year results released on February 7, 2013, Coinstar (CSTR) reported Q4 EPS of $0.75, beating estimates by $0.02. The 8.4% increase in Q4 revenue ($564.10 million) was primarily driven by 9.6% growth in Redbox revenue ($488.3 million), which in turn was due to new kiosk installations. The Coin segment revenues remained flat at $74.5 million.
The stock is trading at 2.56 times book value with P/E (TTM, intraday) ratio at 9.87. The day after the results were declared, the stock lost almost 7%. However, overall gain since October 25, 2012 when the company declared its fiscal Q3 results is 10.49%.
Is the stock fairly valued or is it a value trap?
Coinstar is primarily engaged in the business of providing automated retail solutions. Major revenue is from its Redbox business where customers can rent or purchase movies and games from self-service kiosks. The Coin business allows consumers to convert coin to cash or stored valued products at coin counting kiosks. The New Ventures segment is engaged in identification and developing new concepts of self-service for offering convenient products and services.
The company has approximately 42,400 Redbox DVD kiosks and 20,300 coin-counting kiosks installed. In addition, it now also owns the self-service DVD kiosks of NCR Corporation (NCR), the company that it acquired in June 2012.
The Big Worry Going Forward
The biggest worry is that the DVD business is dying; as they say, it is so 2009. Things changed with the advent and popularity of streaming media offered by Netflix (NFLX) and other entrants in the space.
According to a report published in Bloomberg, there was hardly any growth in expenditure by consumers on DVDs in 2012. Consumers in U.S. spent $18 billion on DVD rentals and purchase, which was up by only 0.2% from what they spent in 2011. Subscription services for DVDs declined by 31% in the quarter and 28% as compared to 2011. DVD rentals also suffered albeit to a lesser degree - 5.1% drop in the quarter and 24% for the year.
On the other side, according to the same report, streaming services, sales of digital media and Blu-ray discs increased 25% for the quarter and 28% for the year.
History is repeating itself: sale of DVDs is suffering the same way packaged audio media suffered ten years ago. It is becoming quite evident that consumers are more comfortable sourcing movies through the Internet rather than with packaged media.
Buy or Sell
Out of the 14 analysts that provide recommendation to the Nasdaq website, nine are of the opinion that it is a strong buy at this price. The other five recommend holding the stock. I am sure there would be quite a few others who have put CSTR on their sell list. I could locate one who has put a price target at $35.
With DVD sales falling (and Coinstar is primarily in the DVD space), one wonders what is driving analysts to recommend it.
Why Buy CSTR at this price?
Admitted that DVD sales are falling, but Coinstar's Redbox is still the biggest player in DVD rentals. The company also enjoys benefits of its large distribution network and its relationship with some of the largest retailers in the country. In addition to that, the coin segment, even though it accounts for only one-fourth of the company's operating profit, has an operating margin of 24% and there is no threat of competition in this space.
However, the biggest reason is Coinstar's partnership with Verizon Communications (VZ) for launching Redbox Instant. The service provides consumers the ability to access Redbox DVD rentals along with online movie streaming. The service, earlier slated for launch in the fourth quarter 2012, has been postponed to first quarter 2013. It is probably for this reason that the company has undergone a major change in top management; the current CEO retired unexpectedly and the CFO got promoted to the top position.
Redbox Instant will also be available to users of Microsoft's (MSFT) Xbox 360 soon as the two companies have signed an agreement for exclusive console launch rights. Coinstar is also planning to launch a line of gourmet coffee vending machines in the near future.
Besides, there are also some financial and technical reasons for buying CSTR.
- Earnings growth in the long term is projected to be 18.78% in the next five years. EPS for fiscal year ending December 2016 is estimated at $8.7 per share against the current $4.63.
- It is also worthwhile mentioning here that the company has beaten estimates for six quarters in a row suggesting that analysts are consistently underestimating Coinstar's earning potential.
- At $48.47, CSTR is trading at forward P/E (December 2013) of less than 8.5, which is much less than other companies in the media distribution space.
Forward P/E December 31, 2013
However, before coming to a final conclusion, investors need to consider that
- Competing with the likes of Netflix and Amazon (AMZN) is not going to be as easy as it sounds despite the change in management.
- The deal with Verizon is likely to be a big drain on cash.
- Why the company did not choose a share buyback program considering that its share was trading at a low P/E multiple.
All said and done, it is my considered opinion that CSTR has a reasonable potential for growth. Considering that stock fell down by 7% on Friday, I would buy a small quantity at this level and keep buying at dips.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.