Everyone saw Coinstar (CSTR) blow up on Friday after the company reduced guidance. In spite of my negative view of the company, detailed in the article titled “Why Would Any Investor Buy Coinstar?” on November 22, 2010, I didn’t expect things to deteriorate this quickly. From the details, I am not sure if business is really falling off a cliff or whether, as some analysts suggest, this was simply a quarter of bad product mix and poor management execution.
The Justifications Come Fast and Furious
Check these analyst comments following the corrected guidance and stuck pummeling.
Wedbush Securities analyst David Pachter this morning reiterated an Outperform rating on the stock, while lowering his price target to $62 from $67. Pachter thinks the miss was a result of “overly aggressive guidance” rather than a problem with the business.
Michael Olson with Piper Jaffray reiterates an Overweight rating, while cutting his price target to $56. “The real question is whether the DVD kiosk story is over, and our take is that kiosks will continue to gain share over the next couple of years,” writes Olson. The miss in the quarter was a “function of inventory management,” not a failure for the kiosk business model, he believes.
Ronald Bookbinder with The Benchmark Co. reiterated a Buy recommendation but chops his price target to $70 from $80. He’s still impressed with Coinstar’s growth, he notes, even the 14.5% same-store growth in Q4, though it was below the 21% he had been projecting. The stock is deeply discounted versus peers, he writes, even though the company shows “growth and leverage.” His price target represents 24 times his new 2011 estimate for $2.90 per share.
Gaming the End
The note from Michael Olson at Piper is my favorite. “The real question is whether the DVD kiosk story is over, and our take is that kiosks will continue to gain share over the next couple of years,”
Here is my take. I don’t know if the Kiosk story is over either. Michael suggests in his own analysis that the kiosk story will “continue to grow” for the “next couple of years”. Seems to me he is concluding there may still be a couple years left before the “kiosk story” is over. If that is the case, then should CSTR not be accorded a massively discounted multiple given the uncertain timing of but ultimately anticipated demise of its growth business? This implies that, unless there are some other businesses of similar potential as Redbox in Coinstar’s pipeline at some point in the near term, business will begin to decline.
I equate a “couple” of years with the number 2. And I consider 24 months to be “the short term” for investors. Given that even the analysts following the company believe the Redbox story may be over in the short-term, the stock should trade at a discount to the overall market, as Coinstar’s business will decline, not grow, in the not-too- distant future. I assign a P/E multiple to a business with declining prospects and a debt-laden balance sheet of 7. I use Ronald Bookbinder with The Benchmark Co.’s 2011 earnings estimate of $2.90/share and arrive at a price target of $20/share. That’s 50% below today’s price!
The Microsoft (MSFT) Watercooler Syndrome
Market analysts could be put to better use. Microsoft is a terrific example of the wasted resource of analysts. According to Yahoo, there are 32 analysts sitting around the collective Wallstreet watercooler kicking around ideas about the prospects for Microsoft (MSFT). The stock hasn’t done anything in 20 years. What value are these people offering? This has got to be the greatest gig in the world. You literally don’t have to do anything! I will bet you it’s a family birthright to cover MSFT in perpetuity – a multigenerational entitlement not to contribute any value to investors. Some father must have covered MSFT for 10 years, retired and passed on the reins to his son. Now his grandson is waiting his turn. Can’t these smart people be assigned something to do that adds value?
Coinstar is another example of poor use of research resources. Why should anyone bother about this company? Even the analysts who cover it are dubious about its longevity based on its current business model. So why don’t those people uncover some companies with solid long-term prospects instead? Long term should be considered at least 5 years. Then when management throws in a bad quarter, or the product mix really does turn out to be wrong, or suppliers fail in delivery of a key component, I could continue to believe in the company’s long-term prospects and see it is a great opportunity to buy the dip. So instead of considering whether the story is “over” or not, with almost 3000 companies listed on the Nasdaq alone, why not move on to better investment options?
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.