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  • Should Coinstar Spinoff Redbox?

     Heard on the Street had a column today about Redox and their parent company Coinstar.  Essentially the article called for investors to sell their Coinstar stock based on valuation.  

    Currently, Coinstar is trading at about 44 times 2009 earnings (which they are expected to beat).  While, Netflix is trading at around 27 based on 2009 earnings.  The argument could be made that 44 is clearly a reflection of the investor’s optimism for Coinstar to beat earnings and a more reasonable multiple of 35 is probably the correct valuation (based on future growth prospects). 

    This leads me to my point, what are Coinstar's options to sustain shareholder value. In the next year they will probably have to compete directly with both Netflix and Blockbuster.  Blockbuster has already started testing kiosks and plans to start rolling them out in full force in the next couple of months.  While, Netflix has decided to stay out of the kiosk market for now. 

    With the increased competition from Blockbuster and the crowded rental market in general, what should Coinstar do to avoid a falloff in growth and revenue?  For now and the foreseeable future, no matter what Blockbuster does there is going to be growth with Redbox. But, at some point they will hit a wall and Blockbuster will eat into their profits and maybe their margins (however it is more likely Blockbuster is going to get the margin damage). 

    The best option for Coinstar might be a spinoff of Redbox.  The market would value the spinoff based on future earnings and the potential for Redbox would be inflated based off of positive results thus far. 

    The hopefulness surrounding any offering would help shareholders get a pure play on Redbox.  Which is the reason many of them are looking into Coinstar in the first place.  This could also pave the way for a takeover by Netflix or a move by another media company to acquire Redbox at a heightened valuation.  This is something shareholders always enjoy.  

    The only problem at this point is the IPO market.  Only a handful of deals have been done this year, and only the strong companies have succeeded. 

    If anyone could break through the frozen IPO market it would be Redbox.  The $1 dollar service is clearly recession proof and recessionary forces are actually likely to increase Redbox rentals. Moreover, they have not even begun to penetrate a majority of the markets.  

    When the street values a company at 44 times this year’s earnings, it is a reflection of confidence in a company’s future.  Therefore, a deal might be able to happen, despite the strong head wind. 

    To lock in gains now, they could sell a majority of the shares and keep the proceeds to invest somewhere else.  They could also maintain an interest, in case this decision turns out to be regretful.  

    Will this likely happen?  Probably not.  But, even though it sounds crazy, and probably is, it could be the best move in a long term plan for Coinstar.  

    *This post first appeared on

    Tags: OUTR, NFLX, BBI
    Apr 06 12:37 AM | Link | Comment!
  • Should Nike Buy Under Armour?

    Nike needs to start considering what benefits they would have by exploring a purchase of Under Armour.  Nike has tried to duplicate many of Under Armour's signature products, including the first product, the Under Armour underwear gear.  Additionally, Under Armour's cold gear is a popular item for football players in cold weather games, along with their increasing popularity to younger generations of athletes.   

    Under Armour's recent introduction of running shoes is also a threat to long term shareholder value for Nike.  As of right now, the shoes are barely noticeable to Nike, with billions of dollars of sales in running shoes and running apparel for Nike.  Under Armour is only trying to steal a small piece of the pie.  But, with young consumers very aware of the Under Armour brand, it seems that Under Armour has the momentum to one day steal a greater piece of that pie.  Nike could act now to thwart any chances of Under Armour damaging their market share.  Obviously, any threat is years away, but now is the time to put an end to that possibility.  

    But, the biggest benefit would be a purchase of Under Armour at a depressed price and before they truly start developing momentum as a public company.  Currently, Under Armour is trading south of $20 a share ($18.07 as of April 3).  Nike could use their $2.6 Billion in cash or more prudently offer a deal that includes their stock as consideration.  

    If Nike offered in the $28-33 a share range they would be offering an excellent premium. A premium that most shareholders will not be able to turn down, and a price the board will have a hard time rejecting (but they will try and try hard).  

    CEO Kevin Plank, would likely put up a strong fight.  It is doubtful that he would want to sell the company he has built from the ground up at such a young stage or even at all. That is why the strong premium would be necessary. Insiders currently own less than 7% of the company. This means Plank does not have the votes necessary to defeat a strong takeover attempt by Nike.  He would have to show his large shareholders that he has a long term plan superior to the offer by Nike.  A difficult burden, considering the economy and retail's relative uncertainty.  

    Nike needs this deal to take advantage of the recession.  They have an iconic brand and management has made prudent decisions over the last decade.  Nike has a relatively small debt load for a retailer (800 million) and this would not add to that burden. Moreover, Nike still has momentum in a variety of developing nations, introducing Under Armour would only help that cause.  

    Pulling the trigger now will allow Nike to gradually incorporate Under Armour within their brand and decrease competition for many of the products they sale head to head. This will have the benefit of increasing margins and stifling any attempt at price wars.  

    Nike can clearly compete against Under Armour, and probably win most of the battles over the long run.  But, instead they could acquire Under Armour at a discount price, use their inventory controls, superior management, and industry knowledge to build a stronger Under Armour, cut costs and create a real asset to shareholders.  

    Such a purchase would also ensure that Nike's growth continues.  Nike is becoming a mature company and growth is still respectable, but Under Armour if properly utilized and managed could add to the bottom line in a big way.

    At the very least, Nike needs to consider the option.  And if they deem the option to be profitable, they need to act quickly, because Under Armour will not always be trading under $20 dollars a share.  

    *I do not have a position in either Nike or Under Armour, nor have I ever.  

    *This article first appeared at


    Tags: UA, NKE
    Apr 05 7:44 PM | Link | 1 Comment
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