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I try to follow the valuation advice of Phil Town (www.philtown.typepad.com), though I am certainly a novice investor.
  • Coinstar Is On Sale, But Not For Long! 1 comment
    Jan 27, 2013 3:23 PM | about stocks: OUTR

    I try to follow the valuation advice of Phil Town (www.philtown.typepad.com), though I am certainly a novice investor. The following is my attempt at a valuation analysis of Coinstar (CSTR):

    "Do YOU want to own it?" Turning coins into dollars. Brilliant! Worthless coins in a Coinstar machine become funds for a Starbucks latte! Most revenue comes from Redbox, though, and I love Redbox. Convenient, cheap, and reliable. That's all I need.

    "Understand it?" They get paid turning coins into dollars AND fully automating DVD/Blu-ray rental. Compared to big box movie rental stores, Coinstar only takes up 10 sq. ft. in front of popular retailers (McDonald's (NYSE:MCD), Walmart (NYSE:WMT), Walgreen (NYSE:WAG), CVS
    (NYSE:CVS),etc) with high traffic…AND doesn't have to pay for seasonal staff to man the desk. Brilliant! They're partnering with my favorite cell phone carrier (Verizon Wireless (NYSE:VZ)) to create Redbox Instant to stream movies online. Redbox Instant will seem to be a direct competitor to Netflix with its DVD rental and online streaming combination, at a similar price point. In my mind as a customer, though, it's not competition…it's more variety! My husband and I plan to use both Netflix (NASDAQ:NFLX) and Redbox. (We dumped cable TV two years ago and don't plan to ever go back)

    "Is there a Moat?"

    I think the moat is a price and brand-by-association monopoly. The future of the industry is quirky…half the population thinks coins are useless and DVDs won't exist in 5 years…the other half say the poor use cash and need free ways to use coins, and Blu-rays will keep rentals going. But Coinstar's investing in other areas like event tickets and streaming online, which aren't disappearing. We've got moat, see the following for proof:

    1. Moat companies have consistently growing numbers:

    a. Sales growth is consistently over 25%. It looks like it peaked 4 years ago, so future numbers will need to be watched closely.

    b. EPS growth 9 years ago was 3.8%, but I'm ignoring that because it's grown consistently ever since, with numbers like 18.96%, 40.47%, 77.83% (8yr, 5yr, 1yr).

    c. Real Equity has grown consistently for the past 5 years, but lately at 23%. It had three of the last ten years around 8%, but I don't think that is a no-go issue.

    d. Debt to Free Cash Flow Ratio is 1.33, which is good.

    e. Free Cash Flow growth has been above 26%, but 75% recently. Cash from Operating Activities has grown a minimum of 25%, but 35% recently.

    f. ROIC was 8.4% at 5 year, but it's now 16.5% for 1 year.

    g. ROE is most recently 7.37, but was 17.59.

    2. Monopoly: There are five major types of monopolies, so which one is Coinstar? I googled 'Best Coin Kiosk' and I got websites for Cummins Allison Money Machines, Amazon.com (NASDAQ:AMZN) coin sorters, and then finally a Coinstar locator. But I didn't expect that to be Coinstar's monopoly. So, I googled 'Best DVD Kiosk' and I discovered that Best Buy (NYSE:BBY) in Canada has its own kiosks for movie rentals. I also read something about Blockbuster's kiosks trying to compete with Redbox. So, Redbox is #2-#3. I googled 'rent a movie' to result in Blockbuster, Redbox, and Apple (NASDAQ:AAPL) iTunes…followed by rentamovie.com and then Netflix (NFLX). The web wasn't getting me anywhere, so I turned to Redbox's website, which says "Rent movies and video games for cheap, at the places you already shop." Coinstar's website says "The brands you love. No fee." So, what's the monopoly?

    a. Price? Yes…movies at Redbox are "cheap" and coin counting at Coinstar is "free"

    b. Switch? No. I can still be a Netflix (NFLX) subscriber and count coins at the bank.

    c. Toll? No. I don't have to go through Coinstar for my movies or coin counting.

    d. Secret? Are they innovators? Maybe. Their machines take up little space to turn profits, but other companies seem to be able to do this too…

    e. Brand? Not exactly. If a Blockbuster kiosk stood next to a Redbox kiosk, people might choose Blockbuster. But, Redbox locations are at major retailers that are visited for their brand moats (McDonald's (MCD), Walmart (WMT), Walgreen (WAG), CVS (CVS), etc). They have to be getting a moat-like effect from that, too.

    f. Coinstar's monopoly comes from its prices, with a little help from innovation and great partnerships with Brand moat companies.

    3. Future of the industry: Will this industry be bigger or smaller in 2023? Estimates are DVD rental will be down…but that ignores Blu-ray player sales, which grew by 30% last year. So, Blu-ray rental isn't going away anytime soon (I think). Coins in circulation are big ("We estimate that, at any one time, there is $7.0 billion to $10.0 billion worth of coin sitting idle in households in the U.S."), but I wouldn't say that area is growing with the increased use of credit/debit cards and the increased favor of pre-paid cards. Kiosks are widely popular, so more research is needed to see how this industry is growing (or fading). Zacks says Industry is growing 13.5% in the next 5 years.

    4. Conclusion: Big numbers with a price monopoly and brand-by-association monopoly get us off to a good start. If the future of the industry is sound, we've got moat.

    How is the Management?

    CEO transitions to J. Scott Di Valerio (NASDAQ:CFO) in March 2013. Awesome news! (Mr. Market dropped because he doesn't think we know Mr. Di Valerio) Fortunately for us, J. Scott Di Valerio was interviewed in December 2012 (Read it: http://www.argyleforum.com/downloads/j._scott_di_valerio,_coinstar_-_argyle_conversation.pdf). Excerpts follow.

    Why I think he's perfect for CEO successor: (in his own words) "[Coinstar's CFO] is a broader role [than other companies], and in working with our CEO and others it's really about setting the overall core strategy of the business and how we're going to double the business in five years, and then double the business again after that in a practical way and that gets a great return for our shareholders."

    Big Audacious Goal (BAG): "What we do is build relationships up through an automated retail solution."

    How does he intend to do that? "So we have six organic seeds that we run like a venture. The GMs have venture advisory boards that they report to which are made up of internal and external folks. There's a set budget that each of these folks is given, and criteria they have to hit which line up with similar progressions that we did with the Coinstar and Redbox businesses. If they're not hitting those targets then money can get pulled away and put onto other ventures or their venture can get shut down. In that regard, it is the survival of the fittest, which is how we want it in order to get products to market in a way that make sense and continues to extend out the brand. Some won't make it through the criteria that they need to meet, but a couple will survive as we look to double the size of the company over the next five years."

    What kind of guy is he? "If you create the right atmosphere then the employees win, your consumers win, your partners win and your investors win because you will get great return. As they become leaders in their spaces a lot of companies don't nurture their ecosystem, and eventually the ecosystem and the company gets sick. We've really tried to figure out how we can continue to nurture the ecosystem in the places that we go, while getting the right returns for our shareholders."

    Margin of Safety (NYSE:MOS)

    Calculating Sticker Price:

    1. Current EPS: 4.90

    2. Zacks Growth Rate: 18.48% Historical Growth Rate: 29.6% Industry Growth Rate: 13.5%. I'll use industry number.

    3. Future EPS (in MS Excel): =fv(13.5%,10,,-4.9) = $17.38

    4. Future PE: 2 x 13.5% = 27. Historical is 24.3. I'll use historical.

    5. Future Value in 2023: 24.3 * $17.38 = $422

    6. Sticker Price in 2013 (in MS Excel): =pv(15%,10,,422) = $104

    7. 50% Margin of Safety = $104/2 = $52

    8. Current Price = $52.06

    9. Do we have margin of safety? Yes! 50% Sale Going on Now!

    What does Mr. Market think of Coinstar? Zacks Rate is a Green 3 and it says HOLD. (which is good b/c I bought at $48 a week ago) News is all over the place because annual earnings are about to come out. PE is 9.23, which is well below its competitors (NFLX is 251! And it's rated buy!! (yuck!)). Just last week, Mr. Market didn't know what it wanted to do about this one until NFLX's earnings came back positive. Now the Market is on the up!

    I hope the earnings report February 4th is full of good news. I'm sure it will be, because Redbox Instant (http://www.redboxinstant.com/) is now online and streaming!

    Disclosure: I am long CSTR.

    Additional disclosure: I am not an adviser. I am not licensed. I am not offering advice because I have no idea what might be right for you, and I'm not trained in any way to know what is right for you. Anything I post is for my own general education and is probably not appropriate for you.

    Stocks: OUTR
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  • heyjojo
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    Author’s reply » Since posting this, the management claimed in the annual earnings announcement that the 2013 EPS growth rate will be 5-17%. Five percent is too low for me to accept, so I will no longer be tracking this stock.
    10 Feb 2013, 10:18 AM Reply Like
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