Coinstar: Strong Outlook Could Propel Shares To New Highs

| About: Outerwall Inc. (OUTR)

Shares of Coinstar (CSTR) ended the week on a strong note closing 7% higher to $65.78 after trading as high as $69.74 earlier in the session, after the lender of DVD's known from its Redbox segment raised its full year 2012 guidance.

Outlook

Coinstar raised both its first quarter as well as its full year outlook. For the first quarter Coinstar expects earnings per share between $1.36-$1.40 vs. a consensus estimate of $0.90. For the entire year the operator of coin-counting stations and movie kiosks expects earnings to come in between $4.40-$4.80 vs. a consensus estimate of $4.09

A guided revenue range of $2.155-$2.280 billion is in line with analyst expectations who expected full year revenue to come in at $2.22 billion. Coinstar's first quarter revenue guidance of $567-$569 million beat analysts expectations by a far range.

The strong quarter came as a result of increased consumer demand at its Redbox movie kiosks for big movies such as "Moneyball" and "Puss and Boots". The strong first quarter results indicate that the 20% price increase for its Redbox DVD rental last November did not result in customer defections. Competitor Netflix (NFLX) hiked its prices last summer which led to customer defections en masse and resulted in a 75% share price decline.

Valuation

The company ended its fiscal year of 2011 with $342 million in cash and equivalents and operates with $397 million in debt leaving a net debt position of $55 million. The company holds about $275 million in goodwill and intangibles on its balance sheet.

After Friday's rally shares are valued at $2.0 billion which corresponds to a 1.1 times annual revenue multiple and 19 times 2011's earnings. These multiples will fall to 0.9 times revenue and 14 times earnings on the back of the 2012 guidance. Main competitor Netflix trades at 1.8 times annual revenues and about 25 times earnings.

Investment Thesis

Coinstar has shown phenomenally fast growth in recent years although year-on-year percentage growth is slowly coming down. The company had a strong 2011 in which it managed to double profits as margins peaked at 5.6%

Besides strong growth the valuation multiples look reasonably both in absolute terms and compared to major competitor Netflix which trades at a significant premium. Shares have traded in a $40-$60 trading range over the last two years but could break out as shares are trading near their all time highs.

Aggressive investors could pick up some shares for a short term ride on the back of the strong results. Furthermore the strong guidance upgrade should provide some support for the coming trading months as shares could set new all time highs.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.