Redbox parent company Coinstar (CSTR) was mentioned heavily in the news this week. The company launched its Redbox Instant service nationwide on Thursday. Investors and analysts continue arguing whether the service will hurt Netflix (NFLX). Today, I offer up several other highlights from Coinstar and why you should go long shares now.
In a partnership with Verizon (VZ), customers can now utilize Redbox Instant to watch movies on television, tablets, and smartphones. Customers are offered a one month free trial before they begin paying a monthly subscription. Monthly rates range from $8 to $9 depending on whether customers choose regular DVDs or Blu-Ray DVDs. Along with a monthly subscription to stream movies, customers get four free physical discs from the company's popular kiosks.
Redbox Instant offers only 4600 streaming movies to start with. This is significantly lower than the amount of viewing options offered by Netflix and Amazon's (AMZN) Prime service. However, Redbox does have one significant difference. Each month, subscribers get four additional physical discs from Redbox kiosks, which could provide enough of an advantage to make some people switch. This is similar to Blockbuster's old strategy of beating Netflix. The once popular movie chain offered a through the mail subscription, where customers could also exchange their mail discs for physical copies in stores once they were done.
The number of viewing options on Redbox Instant should pick up as the company continues to negotiate with studios. Currently, the company has a partnership with EPIX, which is owned by Paramount (VIA), MGM (MGM), and Lions Gate Entertainment (LGF). EPIX offers many hit movies, but is also available on Netflix and Hulu Plus.
I highlighted the Redbox Instant strategy in a December article. The move is a smart one by the company as it is in an already strong area of the company's operations. The company's large database of customers should also help create interest in the service. While Redbox Instant won't be a Netflix killer, it does place the company in a growing field where more than one company can compete and succeed.
Five Key Numbers
One of my favorite things about Coinstar going forward is its specific goals for the next five years. From the company's analyst day in February, here are five key numbers to know:
· $4 billion - The company's goal is to double its annual revenue by the year 2017. This growth will come from already existing products and the implementation of several new automated retail kiosk ideas.
· 3 - Coinstar believes there are three global trends in automated retail that will drive the company going forward.
· 6 - Coinstar operates in six consumer sectors: Food and Beverage, Electronics, Entertainment, Beauty, Health, and Money.
· $16 billion - The company has identified the automated retail sweet spot in its operating sectors as $16 billion.
· 20% - In the next five years, Coinstar hopes to have a return on invested capital of 20%.
Food and Beverage
One of the earliest kiosk concepts was the vending machine. Coinstar is now using its Redbox technology to grow the old vending machine concept to provide fresh food to business workers. The company's Crisp Market kiosks are being tested at several locations in 2013. The company thinks there can be over 50,000 of these kiosks in the United States. Each machine has 100-200 transactions per week.
In 2012, the company opened their first Crisp Market in the Chicago market. In 2013, plans now call for the company to build out the Chicago market before expanding nationally.
Coin Counting Upgrades
As it name implies, Coinstar started as the company behind the popular Coinstar kiosks. The machines are the standard in automated coin counting, and can be found in the largest retailers around the country. In fact, Coinstar kiosks have a market share of around 80% in the United States. The machines are also growing internationally as the kiosks appear in four countries and count four different currencies. Coinstar has two new exciting initiatives to transform this already strong revenue source.
Coinstar announced a partnership with Paypal (EBAY) that will allow customers to add the change that is counted directly to their Paypal account. Customers can also visit a Coinstar kiosk to deposit or withdraw money to and from their Paypal account. Paypal is growing, and is being offered as a payment option at more and more retailers. This is a smart move by Coinstar, and in tests, showed that people visited the kiosks more often to deposit and withdraw money, creating an additional revenue source for Coinstar.
Another new initiative still in the test phase is creating coin counting partnerships with financial institutions. These machines would be like ATMs, where customers of that particular bank wouldn't face fees and could deposit the coins directly into their accounts and also withdraw and deposit money from their accounts. Customers from other banks could use the machine, but would face fees. This seems like a smart idea to me, and is a direct result of the Paypal testing.
Gift Card Exchange
Thousands of gift cards go unused each year. Now people have the chance to exchange those gift cards for cash through a Coinstar owned kiosk concept. At the end of 2012, Coinstar had 50 gift card exchange kiosks in operation.
This concept seems like a no brainer to have in every shopping mall across the country. Customers can exchange the unwanted gift cards and get cash they can use in other stores. The kiosks compete with several websites that offer the same service, but give instant gratification of cash in hand that may keep the kiosks as the go-to service.
Rubi Coffee Kiosks
The Rubi kiosk was one of two new services I highlighted in my last Coinstar article. In a partnership with Seattle's Best Coffee (SBUX), Coinstar is offering fresh brewed coffee through a kiosk. This is a smart move, as coffee is a huge drink market, and the instant delivery without having to wait in line could prove rewarding for customers and the company.
Coinstar is already working on the second generation of the kiosk that will have more capacity and a larger touchscreen for accuracy. In 2012, there were 80 kiosks in five cities. The initial launch was in Washington D.C., Seattle, San Francisco, Los Angeles/San Diego, and Chicago. Coinstar used existing partnerships with retailers like Wal-Mart (WMT), Sam's Club, Safeway (SWY), and Ralph's to launch the kiosks.
The average kiosk handled 25 transactions per day and had a $12,000 annual revenue average. With popularity and word of mouth, transaction counts should improve. In the second quarter, Coinstar will launch the Rubi in 10 additional markets. In the end, Coinstar sees a market of 65,000 to 70,000 kiosks nationwide.
Along with the Rubi, I offered Event Tickets as the other idea Coinstar investors needed to know about in my last article. Coinstar rolled out the upgrade to its Redbox kiosks in select markets offering live concert and sporting tickets for a $1 fee. Coinstar took Live Nation (LYV) and its Ticketmaster unit head on by offering tickets from venues as an additional service in the Philadelphia market.
Since that time, the service has now expanded to the Los Angeles market, which has numerous venues that can offer tickets. The Redbox tickets concept is a great cross-promotional tool, as it gets people who rent movies to purchase tickets, and also drives people to the kiosks to purchase tickets, who may then start renting movies.
With over 35,000 Redbox kiosks in the United States, Coinstar is focusing its Redbox expansion in Canada. New partnerships with several large retailers should help expand the base quickly. The company's guidance is calling for 1500-2000 kiosks to be opened in the country.
A successful launch of Redbox Instant could help Canadian expansion, as the company could begin offering the streaming option in the country as well. All of these additional kiosk concepts could also head north once they have established a base in the United States.
Revenue and Earnings
In fiscal 2012, Coinstar posted revenue of $2.2 billion. The company's earnings per share were reported as $4.83. Coinstar's guidance for 2013 revenue is a range of $2.4 to $2.6 billion. Earnings per share are expected to fall between $4.91 and $5.51. Analysts on Yahoo Finance are calling for earnings per share of $5.15 from $2.42 billion.
The company's price to earnings ratio falls between 10.2 and 11.4 based on Coinstar's earnings guidance. Going forward, shares trade at only 9.7 times the expected $5.80 earnings per share expected by analysts in fiscal 2014.
In fiscal 2014, analysts expect revenue to increase only 4.3% to $2.53. This doesn't seem to match up with the company's current five year growth plan to hit $4 billion. I think analysts are counting on these additional kiosk concepts to flame out and be non-contributive to earnings going forward. Therefore, shares trade at an extreme value going forward on an already underestimated earnings per share target.
In the fourth quarter, Coinstar posted revenue of $564.1 million. Of that total revenue, nearly 87% was from Redbox kiosks ($488.3 million). The addition of these other kiosks should help diversify the company's revenue base. Canadian expansion should also help ease the dependence on American revenue.
There are currently more Redbox kiosks in the United States than McDonald's (MCD) and Starbucks combined. The company plans on only opening 500 to 1000 Redbox kiosks in the United States in fiscal 2013. As the company reaches its saturation point in the United States, it has wisely turned to other kiosk concepts to diversify its revenue and keep its growth profile on track. In fiscal 2013, the company will add 1000 to 2300 kiosks in concepts other than Redbox and Coinstar.
I believe Redbox is only the beginning for this company. I have recommended shares on several occasions, including October at a price of $46.80. Take advantage of these value prices and enjoy the ride that Coinstar offers for long-term investors.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CSTR over the next 72 hours.