Building A Case For Coinstar

| About: Outerwall Inc. (OUTR)

Countless times I've heard streaming content supporters chant their mantra that "physical DVD delivery" is soon to be dead and Coinstar (NASDAQ:CSTR) will go the same way. While I agree that streaming services have much to offer subscribers, I believe that both the demand for physical DVDs will remain strong and that the economic structure of the streaming services is unsustainable.

First, a look at the first argument with regard to demand for physical delivery. Physical delivery will remain strong because of the necessities of the streaming model. First, a device capable of linking to the internet, next paying for the subscription, followed by the capability of a network to deliver the streaming service. While there are many TVs now created as "internet-ready" they still tend to be pricey and out of the price range for those consumers still looking to trim costs. Most of the modern consoles offer internet access but I am skeptical of the number of families willing to purchase a console if not using it for gaming capabilities. This is followed by the requirement of a monthly subscription, which is charged regardless of whether you have the time to use the service. Stream one movie or stream 10, the subscription service price remains the same. Finally, in order to have high-quality streaming content, you need a high-quality broadband connection. Many areas across the U.S. simply are not capable of such access. On the other side of the argument, to use physical DVDs you need one thing, a DVD player.

Secondly, and more importantly I believe, is that the economic structure of the currently available streaming services is unsustainable. Movie studios will require higher fees to obtain rights to movies, release dates will be pushed back and in general, the partnership will be one that is tenuous throughout. If you ask me, the monthly subscription fee is dead as well. Instead, rumors have it that CSTR and Verizon (NYSE:VZ) have teamed up and are in the works of developing a streaming service that works off of credits. Thus combining the convenience of a streaming service along with the simplicity of a pay-as-you-go plan. Think of it as the "Prepaid minutes" plan of the streaming video world. This payment structure would benefit everyone. For the consumer, possible discounts for those purchasing credits in bulk, and the convenience of using your credits when needed versus a monthly plan where you are paying upfront for something that you may or may not utilize. The big winner would be CSTR. The company would be assessed a fee only on a single swipe for a single payment amount versus its current payment model of multiple swipes, which ultimately adds to an equivalent amount but accumulates fees faster. Even more beneficial to CSTR would be if it could create customer "accounts" for its kiosks so that such a model could be replicated to the non-streaming business. This however looks unlikely.

As per current evaluation, you may wish to hold off to buy on a dip in the market. With the company currently trading around $46/share, the stock seems to be trading slightly above fair value, which I estimate to be approximately $42/share. My suggestion as an alternative to buying the stock is to sell the February 40 Puts. You can collect a 1.05/contract premium for the short 30-day time period and your breakeven point is set at $38.95, which I consider to be an attractive level to be long the stock given the earnings stability and potential for growth. In order to be put the stock, the stock would need to go on a serious skid, dropping over 14.4% from the current price level, and to only breakeven the stock would need to fall a total of over 16.6%.

Earnings estimates needed to arrive at my fair value price were derived from TD Ameritrade, while details of the Coinstar - Verizon rumors were obtained through TechNewsWorld.Com.

Disclosure: I am long CSTR.