Coinstar Proves Netflix Is Not the Only Game in Town

Includes: NFLX, OUTR
by: Cabot

By Elyse Andrews

We’ve written extensively in Cabot Wealth Advisory about Netflix (NASDAQ:NFLX), which has almost single-handedly revolutionized the movie rental business. From its DVD-by-mail strategy to its online streaming movie service, Netflix has put several bricks-and-mortar video rental stores out of business.

And in the future, Netflix will clearly be concentrating on its instant streaming option: It recently announced a new streaming-only plan for $7.99 a month, while at the same time increasing the cost of its existing DVD-by-mail plans.

But not all movies are available to stream and the company’s DVDs still have to go through the mail, meaning that it can take days to receive the next one from your list. So what do you do when you want to watch a movie tonight? Go to your local grocery store (or even some McDonald’s!) and get a movie from Redbox, which lets you to check out DVDs for only $1 per night.

The red kiosks are part of Coinstar (NASDAQ:CSTR), which first had success with its coin-changing machines in grocery stores and it has now applied this strategy to movie rentals. I wrote about the stock here in June when the stock was trading around 50. It succumbed to the market’s summer weakness, meandering for a few months, but picked itself back up in the fall and was recently recommended by the Cabot Top Ten Weekly. Mike had this to say:

As the movie rental chains have gone the way of the dodo bird, there are two winners left standing—Netflix, which has emerged as the go-to player in streaming content, and Coinstar, which has become the bricks-and-mortar replacement thanks to its more than 28,000 Redbox DVD rental kiosks. The company has been cranking out terrific growth for many quarters, and last week’s third-quarter report revealed more of the same—sales and earnings up 43% and 74%, respectively, and cash flow improving significantly. Importantly, the company also said it’s nearing a partnership to begin its own streaming service, but it’s clear that Redbox (which makes up 80% of revenue and which grew 54% last quarter) is driving the bus right now. Impressively, management gave superb guidance for 2011, including earnings of $3 to $3.50 per share, and free cash flow of up to $200 million (or about $6 per share). It’s a big story.

Mike says the stock is a good buy in the low 60s and we think this story has definitely got legs.

Disclosure: Author has no position.