Netflix Shifting Consumers From Red Envelopes To Coinstar's Redbox

| About: Outerwall Inc. (OUTR)
In 2008, Coinstar (NASDAQ:CSTR), best known for its ability to turn penny jars into dollar bills, earned $0.73 per share. In 2012, Coinstar, increasingly better known for its Redbox DVD vending machines, is expected to earn $3.73 per share. Few companies have been able to grow earnings per share 500% through recession, not even Netflix (NASDAQ:NFLX).
Netflix has, however, served as a catalyst for Redbox's growth. The success forced competitors like Blockbuster out of neighborhoods, giving Redbox the opportunity needed to capture market share. Now, with Netflix's new pricing, Coinstar stands to benefit from its rival again.
While heavy users of mail DVDs won't cancel subscriptions over an extra $5 a month, those renting one or two movies a month may. With Redbox found in most grocery stores, it offers a compelling, convenient and inexpensive alternative. A winning combination given Q1 market share was up 9.3% year-over-year to 33.2%.
DVD Unit Market Share
Q1 2010
Q1 2011
% Change
Mail Order
Bricks & Mortar
Source: NPD VideoWatch Data
Click to enlarge
Short sellers remain unimpressed. They're sitting on 13 days of average volume short in Coinstar. Pessimists believe streaming is the future. If, and it’s a big if, content providers can ever solve the new release headwind, streaming may sink Redbox, or at least force it to make a bigger commitment to its own streaming program.
But with innovation comes opportunity. And, ramping 3-D movie content and ongoing pipeline capacity concerns remain bullish for rentals over all. Restricted capacity may be the reason behind Netflix's price change. Particularly as it has to deal with the risk of higher priced bandwidth. Some low volume consumers will choose to keep streaming. Others will keep mail order for new releases. Many will choose only one of the two. And, that means an opportunity for Coinstar.
At today's stock price, Coinstar is trading at 15.60x 2012 expectations. Pretty cheap when you consider its five-year PE low is 17. With 26,100 DVD kiosks and another 5,000-6,000 planned for this year, it's likely Coinstar will win over new users, including those spurned by Netflix's decision. If we extrapolate its current PE of 20 to next year, we have a mid $70's stock, a far cry from irrational exuberance.
Adding additional upside is Coinstar's video game roll out, which began in June. At $2 a day, leveraging existing kiosks, video games add attractive growth and margin opportunity. All in all, Coinstar expected free cash flow of $110-$135 million this year, before any benefit from ex-Netflix users.
So, as Netflix's unintended consequence shifts consumers from its red envelopes, sales at Redbox are likely to increase. Given a reasonable valuation, high short interest, double digit revenue growth and a stock price still nearly 15% off its 52-week high, Coinstar offers investors upside.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CSTR over the next 72 hours.