After announcing its quarterly earnings, the share price of Coinstar (CSTR) fell sharply on Friday. As of Friday afternoon, the company's share price is down by nearly 9%. Coinstar earned 75 cents per share while the analysts were expecting the company to earn 73 cents. The company generated $564 million in revenues whereas the analysts were expecting it to generate $580 million. More importantly, the company expects to earn between $4.91 and $5.51 in this fiscal year. Given the company's share price of $47, what is so bad about these numbers? After all the company's forward P/E ratio is below 10? Let's find out.
It looks like many investors are worried about the competition between Coinstar and Netflix (NFLX) and they don't see Coinstar as a strong enough competition for Netflix. I find that ironic because Netflix enjoys a market value of $10 billion whereas Coinstar's market value is at $1.5 billion even though Coinstar earns far more money than Netflix does. In the last quarter, Netflix was able to earn $7 million, whereas Coinstar earned $22.65 million in the same period. I would rather earn Coinstar over Netflix because the company makes more money even though Netflix has more market share. It seems like the investors of Netflix believe that the company will put all competition out of business and become the only company in its industry, and many are banking on it. I would rather buy a company that currently makes money than buying one that might possibly make money.
While I believe that Coinstar is a better buy than Netflix, this doesn't mean the company doesn't have any issues it needs to work on. For example, Coinstar is having issues with obtaining content in a timely manner. The company's content library doesn't come anywhere near close to the content library of Netflix or Amazon (AMZN), which hurts Coinstar's efforts to steal market share from these companies. As the company buys more content, the costs of running business will increase. Of course this is not a big deal if Coinstar is able to grow its revenues faster than it grows its expenses. Netflix failed at that so far, which means this may be a difficult task to achieve. In January of 2013, Redbox only added 12 new titles, a much lower figure than last January's 23 new titles. Having fewer titles will not help the company much with retaining customers.
Coinstar's Redbox generated $2.57 from each rental on average in the last quarter. This is up from last year's average of $2.52. The difference is very small and many analysts were expecting it to be higher because the company now has a much higher percentage of expensive blue-ray DVDs than last year. This might mean that Redbox is generating most of its revenues from the cheaper kind of DVDs.
Currently, each Redbox machine is able to hold 600 disks from 100 different titles. According to the earnings call, the company will refurbish its machines so that they can hold 80 additional discs, which should allow each kiosk to offer more titles. I believe this is a move in the right direction. In addition, the company's joint venture with Verizon (VZ) will allow it to offer instant streaming online, which should help the company gain some market share.
It looks like Coinstar's growth rate will be slower than in the past unless the company does something drastic in the near future. Given the low valuation of Coinstar, the company looks more like a value play than growth story at the moment. We are looking at a forward P/E between and 8 and 9 depending on the company's future guidance for the current fiscal year. I am not saying that Coinstar's growth story is over, but the investors have currently put the company in a "value play" spot rather than a "growth story" spot, which may or may not change in the future. In the last 5 years, the company's revenue growth has been impressive as it generated $546 million, $911 million, $1.14 billion, $1.44 billion, $1.85 billion and $2.2 billion, respectively.
I've never bought any shares from this company but now I am tempted to add it to my watch list and possibly buy it in the near future. Despite all the challenges faced by the company, it has very attractive valuation at the moment, especially compared to the peers like Netflix and Amazon.