Versatile Coinstar (NASDAQ: CSTR)

Versatile Coinstar (NASDAQ: CSTR)

Coinstar (NASDAQ: CSTR) is best known for its Redbox DVD rental and its coin counting machines. While coin-counting is Coinstar’s more time-honored business, the company produces most of its revenue from its self-service DVD and video game rental businesses recognizable by the signature red color of its kiosks. Coinstar retains contracts to place their kiosks in retail outlets globally. Wal-Mart Stores Inc. (NYSE: WMT), Walgreen Company (NYSE: WAG), and McDonald’s (NYSE: MCD) alone account for 40 percent of company revenue. As of November 2012, the company had placed over 42,000 Redbox kiosks at 34,000 locations and 20,300 coin-counting kiosks in supermarkets, convenience stores, drug stores and restaurants in North America and Europe. 

The Competition

Although to my mind nothing can replace seeing a movie on the “big screen”, movie rentals are a booming business and have been for ages. Coinstar has managed to cash in on the movie rental business with consumer friendly kiosks that dispense new releases without the hassle of waiting in line at video stores. A recent partnership with Verizon Communications Inc. (NYSE:VZ) has resulted in the inception of Redbox Instant, a video-streaming service that is competitively priced ($8.00) with chief rival Netflix’s (NASDAQ:NFLX) streaming service. The Redbox service was launched this past month so the jury is still out performance-wise. Other competition comes from Amazon (NASDAQ:AMZN) who recently signed an agreement with Epix for its own Prime Instant Video service. 

The Pros

Coinstar essentially has a monopoly on DVD rentals. They also have low overhead costs because their kiosks are unmanned, needing only maintenance. The company has raised DVD rental prices 20 percent and has lost much less in terms of numbers. Coinstar has also been able to rack up extra cash from customers in their coin exchange business, raising net margins neatly. The business is expanding into various other niches such as coffee dispensing with their Rubi machines, used electronics via their Gizmo dispenser, and ecoATM, where people can sell their outdated cellular gadgets for cash.  Also of note, recently, 11.7 million shares sold short, which translates into 39 percent of the company’s float. If better than expected numbers come in on the Q4 earnings report on February 7, the short squeeze may well be in play.

The Cons   

Not all news is good news however, and there are a few things which may make an impact on future revenue potential. DVD rentals dropped in 2011 by about 11percent from the previous year. In addition, Redbox Instant charges late fees on borrowed DVDs, something that will not sit well with prospective Netflix converts.  And probably the biggest sting is that Redbox Instant has only10 percent of the video streaming library of Netflix. It also offers no TV shows. It seems it will be difficult to entice Netflix subscribers to switch without ramping up their offerings.

The Numbers

The company traded up 2.18 percent this week, reaching $49.22. Coinstar has a 52-week low of $40.50 and a high of $71.82. The 50-day moving average is presently $50.00. Coinstar has a market cap of $1.45 billion and a price-to-earnings ratio of 9.81. Yesterday, Gabelli Analysts begin coverage on the company issuing a buy rating and an $81.00 target price. Analysts at Northland Securities issued an outperform rating on shares of the company and analysts at B. Riley also reiterated a buy rating on shares.