Redbox Will Keep Raking In Big Profits For Coinstar

Sep.26.11 | About: Outerwall Inc. (OUTR)

Coinstar's (NASDAQ:CSTR) recent sell-off is giving investors an opportunity to invest in a fast-growing company. When Coinstar comes to mind, many investors might think about the company's green coin-counting machines located in supermarkets. Coinstar actually owns Redbox, famous for its bright red rental machines offering $1 DVD rentals. Redbox accounts for a large majority of Coinstar's business and growth.

The recent sell-off in Coinstar was mostly due to concerns about new changes in debit card fees. Under new federal rules for debit fee transactions, Redbox faces a sharp increase in fees. The current fee structure is 1.55% of transaction value plus 4 cents. Visa could revise the fee up to the regulated amount of 0.05% of transaction value plus 21, plus the possibility of another adjustment to account for penny fraud. Since most of the company's transactions are for $1, the fee increase will have an impact on earnings.

Redbox does have a lot of options. The company is currently testing higher fees in some markets. Many expect Redbox could increase rentals to $1.25 to cover the new fee structure. The other option is the company could just get charged once, when customers return a rental, instead of being charged when checking out and returning a movie.

The sell-off appears to be overdone. Netflix (NASDAQ:NFLX) continues to have issues with subscriber losses, and I expect Redbox to continue to benefit from that. Redbox will still be a great value for its customers even if it has to raise rates by 25 cents. I expect the company to continue its strong growth and expand the Redbox business.

I also like that Coinstar has been good to shareholders through share buybacks. The company recently completed a $50 million share repurchase and just authorized an additional repurchase of $262 million.

I don't see any signs of Coinstar's growth slowing down. Revenue in the second quarter 2011 increased 27% to $435 million. Redbox revenue grew 33% to $363 million. Operating income in the first 6 months increased 40% to $89.6 million when compared to the same period in the previous year.

I'm bullish on Coinstar and view this pullback as an opportunity to enter or add to a current long position. Redbox will continue to increase its business as it expands and attracts new customers from struggling competitors like Netflix.

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