Seeking Alpha
, Puget Investor (11 clicks)
Long only, value, growth
Profile| Send Message|
( followers)  

I recently examined Coinstar's (CSTR) quarterly and annual reports and found a few reasons why I believe Coinstar provides an interesting opportunity for investors. Coinstar has three lines of business (as described in their 2012 10-K Filing):

  1. Redbox Movie Rental kiosks - "…Operates approximately 43,700 Redbox kiosks, in 35,800 locations, where consumers can rent or purchase movies and video games and, in select markets, purchase tickets for events. Coinstar also shares its revenue from the Redbox kiosks with the retail locations, making these kiosks a pretty cheap source of income for commercial establishments. "
  2. Coin Counting kiosks -"… Owns and operates approximately 20,300 coin-counting kiosks (approximately 17,300 of which offer a variety of stored value products to consumers) in 20,100 locations, where consumers feed loose change into the kiosks, which count the change and then dispense vouchers or, in some cases, issue stored value products, at the consumer's election."
  3. New Ventures -"… identify, evaluate, build and develop innovative new self-service concepts in the automated retail space through organic growth and external investment. Our New Ventures segment consists primarily of our coffee, refurbished electronics and photo self-service concepts."

Below is a breakdown of revenue by line of business:

Coinstar Revenue by Line of Business
201120122013 (guidance)
Redbox$ 1,561,598$ 1,908,773
Coin$ 282,382$ 290,761
New Ventures$ 1,392$ 2,509
Total$ 1,847,383$ 2,204,055$ 2,450,000

Listed below are three reasons why I think the upside opportunities outweigh the downside risks.

1. Redbox Can Compete with Streaming

As shown above, Redbox is the primary revenue driver for the company, and in a highly competitive content distribution business with some big market players, this reliance on this one channel may be some cause for concern. The market is clearly concerned about continued growth in this sector. It should be noted, however, that even after its move from a low of 43 in October, Coinstar still has attractive forward earnings metrics:

Earnings Per Share
Recent Price201120122013 Guidance
$56.07$3.26$4.67$5.21

Earnings Metrics

Est Earnings growth

Forward P/EForward PEG
11.6%10.760.927

Conventional wisdom is that Redbox sales will wilt in the face of increasing competition from streaming of movies. For people who rent fewer than three movies a month, however, Redbox is a better solution than paying a competitor like Netflix a monthly fee for streaming. Cable providers also stream movies typically charging much more than $1 for current films. For those consumers who have a Redbox kiosk in a convenient location, Redbox can continue to compete with streaming. For proof, note that Redbox reported almost 747 million rentals in 2012, up from 686 million in 2011. Net revenue per rental increased to $2.55 in 2012 from $2.28 in 2011. Redbox is also dabbling in streaming through joint ventures and still expanding its installed base of machines, so it seems a reasonable bet that Redbox business can maintain growth that is better than what is priced into the stock.

2. New Ventures Success would be a Bonus

The New Venture that interests me the most is the Coffee machine. The question will be can these coffee machines siphon off consumers from established coffee shops. If the coffee price is right, the locations are convenient, and the taste of the coffee is decent, the revenue will be there. Starbucks has proved there is a market for coffee that is convenient - the Via instant coffee launched by Starbucks has been successful - and one would think Coinstar could build a machine that makes coffee at least as good as Via. There is no anticipation of growth or revenue for this business in 2013, so any traction in this business or other New Venture is a bonus.

3. Future Buyout Potential

In August of 2012, Coinstar was rumored to be in buyout talks. A buyout does not seem to be outside the realm of possibilities. Coinstar's market cap of 1.5 billion would be easily digestible for a number of suitors, especially given its current valuation. Coinstar's large competitors battling it out in the content distribution space, such as Amazon, Apple or Google might find Coinstar interesting as an alternative distribution model. In addition, these companies would gain employees with experience in retail automation and servicing.

Conclusion

Coinstar is attractively priced with the market underestimating possible upside surprises. With a PEG Ratio of less than 1, the Redbox unit is already priced to assume low growth, so any continued strength in that unit, or in the New Ventures unit, would be a price mover.

Disclosure: I am long CSTR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: 3 Reasons Coinstar May Surprise On The Upside