Coinstar Falling After Updated Guidance a Sign of Things to Come

Jan.14.11 | About: Outerwall Inc. (OUTR)

Coinstar (NASDAQ:CSTR) was halted today due to pending news. After the news the stock went basically one direction: down.

According to Edgar online in the CSTR 8-K filing CSTR expected holiday movie rentals in the famous “redbox” movie kiosks to have higher rental rates. Currently the company is looking for an increase of over 30% greater revenue for fourth quarter 2010 over the same period 2009. Not what I would normally think of as a reason for the stock to go into a free fall but it is all based on expectations as we can see with CSTR. Revenue is expected to come in near $391 million.

Reasons cited for lower-than expected guidance include inventory imbalances due to people returning movies at a greater rate than expected to kiosks that were different than the movies were originally rented from, movie rental fall off happening quicker than expected (new releases becoming stale sooner than desired) and overall sales lower than expected. Having a 28-day delay in titles was included in the reasons for failure to execute as expected. I find that to be the weakest of the reasons given. One reason that I did not notice but am very interested in is how much online streaming of videos impacted the revenue. If online streaming is taking a bigger piece of the market share this could (and I would expect given the cost differences) continue to become an increasingly difficult problem going forward.

Moving from the top line to the bottom line it appears that CSTR is expecting a 38% increase there as well. I think this shows that despite the lower revenue, CSTR management is handling costs well and not allowing the margins to get squeezed as can happen when you don’t make your top line numbers.

I find the sell off to be an overreaction by the market and indeed, I immediately bought and traded CSTR again in after hours trading. CSTR recovered a small amount of the loss and slowly moved higher until it flat lined around 43 per share. Based on the forward PE that is pricing in a lot of growth, I think CSTR is going to have a very difficult time getting back up and staying over $50 a share. I would be very worried as a stockholder that margins will start to become squeezed as online streaming with Netflix, pay per view and others become a greater source for entertainment. CSTR may have quickened the end of Blockbuster and other video stores but CSTR may quickly find itself in the same predicament.

I am not considering the price drop to be a bargain priced sale of CSTR but rather a warning sign of what is to come. I may trade CSTR again tomorrow but only as a day trade and not as a hold.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CSTR over the next 72 hours.