Coinstar: The Cheaper Alternative To Netflix

Mar.26.13 | About: Outerwall Inc. (OUTR)

I profiled Coinstar (NASDAQ:CSTR) in early January when the shares were trading at $50 a share. The shares are up more than 10% since then. Almost all the attention in this space is devoted to Netflix (NASDAQ:NFLX), which is experiencing faster revenue growth but also has nosebleed valuations (just under 140x this year's consensus earnings). Coinstar is a cheap stock and it prospects are improving. As such, the stock warrants an update.

Here are some recent positives for Coinstar:

  • The consensus earnings estimates for FY 2014 have gone up some 8% over the last three months.
  • B. Riley had a piece in Barron's today stating stock could rise 40% to $80 a share. The investment firm states investors are missing how big a market the rental DVD space encompasses.
  • The company finally launched its streaming service.
  • Coinstar floated $350 million of debt at 6% recently. The proceeds will be used to buy back stock and will remove over 15% of float at current price levels.

Coinstar provides automated retail solutions. The company owns and operates self-service Redbox kiosks that enable consumers to rent or purchase movies and video games, as well as self-service coin-counting kiosks.

Here are four reasons why CSTR is still cheap at just over $55 a share:

  1. The stock sells for under 10x 2014's projected earnings.
  2. The company is expected to post 10% revenue growth this year, and the stock boasts a five-year projected PEG of under 1 (.71).
  3. Coinstar has improved operating cash flow by some 50% over the past two fiscal years, and the stock sells for less than 4x current operating cash flow.
  4. Analysts consistently underestimate the company's earnings power. Earnings have beat consensus for seven straight quarters.

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.