Coinstar: Short-Term Has Only One Direction to Go

Includes: NFLX, OUTR
by: Mark Mansfield

Coinstar (NASDAQ:CSTR) dropped significantly two weeks ago with the news that it would miss EPS and revenue due to a delay in getting titles to market. The stock reacted sharply with a drop of more than 25%. Since that time Coinstar has done absolutely nothing, stabilizing in the $41-43 a share range.

Wall Street analysts have come to Coinstar's defense to some extent, as Barron's Tech Trader notes the following analyst comments: "Today, the bulls seem still pretty bullish."

Wedbush Securities analyst David Pachter this morning reiterated an Outperform rating on the stock, while lowering his price target to $62 from $67. Pachter thinks the miss was a result of “overly aggressive guidance” rather than a problem with the business. The company ratcheted up expectations after a strong Q3, and the new 2011 outlook is about where things were back before Q3’s results and the guidance. Nevertheless, he cut his forecast for this year to $1.85 billion, the top end of the new revenue range the company offered, and cut his EPS estimate to $3.10 from $3.34, which is toward the lower end of the company’s forecast of $3.00 to $3.50.

Ronald Bookbinder with The Benchmark Co. reiterated a Buy recommendation but chops his price target to $70 from $80. He’s still impressed with Coinstar’s growth, he notes, even the 14.5% same-store growth in Q4, though it was below the 21% he had been projecting. The stock is deeply discounted versus peers, he writes, even though the company shows “growth and leverage.” His price target represents 24 times his new 2011 estimate for $2.90 per share.

Michael Olson with Piper Jaffray reiterates an Overweight rating, while cutting his price target to $56. “The real question is whether the DVD kiosk story is over, and our take is that kiosks will continue to gain share over the next couple of years,” writes Olson. The miss in the quarter was a “function of inventory management,” not a failure for the kiosk business model, he believes. Forecasting the Redbox business “will continue to be challenging” for several quarters. But the new forecast from the company has “a layer of conservatism,” he believes. Olson’s new estimate for this year is $1.78 billion in revenue and $2.89 in EPS.

But the blogosphere has continued to bash Coinstar, I think mostly due to a misunderstanding of the fact that not all consumers share the same sort of tastes as bloggers themselves. I am perhaps atypical of bloggers in that I don't now, nor do I plan ever to use Netflix (NASDAQ:NFLX). I am not interested in watching movies on my laptop, I'd perfer a TV. I also don't want the hassle of having to either mail DVD's back to Netflix or have an internet enabled TV, Wi, or PS2. For me I want a DVD that I can get either at a store like Blockbuster or at a Coinstar and then return when I am done with it. I know that there are many consumers out there, however popular Netflix may be becoming, who feel the same way. There are many Coinstar locations here in Dallas, Texas, and they seem to be quite frequented. In some cases there are even two Redbox machines and one Coinstar coin machine at the same location.

We also had Jim Cramer come on his show and bash Coinstar the other day in response to a viewer call-in during the "Lightening Round." Cramer said, "I would sell a bounce due to the overreaction, Coinstar seems like another Blockbuster to me." I think Jim Cramer is a bit biased on this story as he is a diehard Netflix supporter, and so I am really not willing to put too much stock in his opinion due to that fact alone, but I think his describtion also doesn't pass "the smell test." Coinstar and Blockbuster are fundamentally different operations. Blockbuster has to pay for massive amounts of retail real estate and stores full of employees. Coinstar has no such burden. Coinstar's fixed costs are fundamentally much, much lower than are those for Blockbuster. Coinstar itself is one of the reasons for Blockbuster's demise. Coinstar is a high growth story, Blockbuster is a declining, bankrupt company. The comparison is ridiculous.

Perhaps the reason to like Coinstar most is because of the fact that it has taken such a profound beating over the last few weeks. From the miss which caused the shares to plummet, to the Jim Cramer call, to every blogger on the planet trashing the stock, it is hard to imagine that there is much near term negative left for Coinstar. On a long term fundamental basis, I am not going to make a call on Coinstar, but from a short term perspective, I think this stock only has one direction to go after it has stabilized from its recent fall.

Disclosure: I am long CSTR.