Our Play for Coinstar

I’m calling Carl Icahn and we’re going to make a play for Coinstar, Inc. (CSTR)!

They had a pretty lame Q4 but it beat beaten down expectations and I think this company is totally missing the boat with just $5M in profits on $138M in revenues. I like the business in general but they are up-front investment heavy and tend to spook investors who have sold them back down to just above their Dec. 2004 3M share stock offering at $25. Revenues are up about 30% since then and the stock is up 15%.

The reason I’m calling Icahn in is that the company now has over 15,000 coin counting machines in operation that sort over a billion dollars a year in coins. Coinstar takes a commission for all the change they turn into dollars but I think they are leaving another $100M on the table!

Since they are getting the contents of everyone’s penny jars we can reasonably assume that there are some coins in there that are worth more than their face value. A reader and I actually did an experiment last year to verify that theory with bank rolls of coins and it works great, just very tedious. There’s also the lesser value of rare nickels but you don’t see them as often in rolls but the rate of return justifies hiring workers to sort the pennies with minimum wage workers.

Heck, you can melt down a nickel and get $07.25 worth of metal! Pennies are even better, pre-1982 they have a metal content worth $0.0175! Try doing that a few billion times and see what you’re making…

Coinstar processes $4M in coins PER DAY and I say we should buy them out for $850M (or take control for a mere $425M) and have some metallurgist come up with a sorter that can pull valuable coins off the line.

The company only makes $20M per year so they are probably not even mining what they have as just getting a 5% premium on the coins they sort would net them $73M per year!

While I’m waiting for Carl to call, I’ll begin a position with the April $30s for $1.25 but very small as I’m prepared to roll the the July $25s if this stock is determined to retest last summer’s lows. If it takes off, the July $35s won’t be going anywhere for a while…

CSTR 1-yr chart

Comments

[Davis Freeberg:]

It would never work. There are laws against destroying currency and it would cost the government too much to replace them. I didn't think Q1 was really all that weak. CSTR is in a great position, I'm not sure how Icahn could do anything, but screw things up if he got there. As long as they keep buying back stock and producing on the earnings front, I think investors will be happy to let management continue the good job they are doing.

2007 Feb 20 08:53 PM

[Philip Davis:]

Sorry if I wasn't more clear - destroying currency is my backup plan. The main idea is to sort through all that change and pull the valuable coins out. That's the experiment we did last year. We found you could pull about $110 from $100 worth of penny rolls from the bank. I would think CSTR gets a much choicer selection of oil coins than that!

2007 Feb 21 07:14 PM