Coinstar – Maybe Not As Doomed As You Think

By Stephen D. Simpson, CFA | January 17, 2011 AAA

The doomsayers will be out in force on Coinstar (Nasdaq:CSTR) over the next few days. The company announced a significant miss for the fourth quarter, took down guidance for 2011 by a significant amount and acknowledged troubles with both inventory management and their assessment of the market.

Queue the write-ups of "Coinstar is doomed!"

IN PICTURES: 5 Tips To Reading The Balance Sheet

But maybe that is too hasty. Coinstar has problems, yes, and a difficult transition to come, but it may be a bit premature to grab the shovels and reserve a hearse.

Studios Sink Coinstar's Holiday
As Coinstar's management tells the tale, the underperformance in the fourth quarter can be laid at least in part at the feet of movie studios belonging to the likes of Time Warner (NYSE: TWX) and News Corp (NYSE:NWS).

Desirous of preserving their ridiculously profitable video-on-demand/pay-per-view and DVD sales, these studios basically forced Coinstar into accepting a 28-day window of exclusion; Coinstar cannot load its Redbox DVD rental kiosks with these new releases for 28 days. Given that the Redbox business model is predicated at least in part on impulse rentals of new movies, that's a serious blow, and that fed into the lower-than-expected same-store sales of 12.5% for the period.

Not All the Studio's Fault, Though
Although that 28-day window hurt, it was not Coinstar's only problem. The company's roll-out of Blu-Ray discs has not proven to be as commercially important as management hoped and planned. Moreover, the company's "rent here, return anywhere" format led to some significant inventory headaches for the company during the quarter.

Doomed? Not So Fast
With Coinstar's poor performance, there will likely be a rush of pundits claiming that it is "proof" that the DVD kiosk rental market has peaked out and/or that Netflix (Nasdaq:NFLX) is now eating Coinstar's lunch with its digital download product. (For more, see Netflix Moves The Goalposts - Again.)

Maybe ... but maybe not.

For starters, investors should keep in mind that digital subscriptions cost more - Apple's (Nasdaq:AAPL) iTunes movie content costs $3 or more, as do the downloads from Amazon (Nasdaq:AMZN). Cable companies like Time Warner likewise charge more than $3 for a movie (often upwards of $4 for a new release). That makes Redbox's $1/day pricepoint competitive, even allowing for the fact that the average rental is two days or more and the business model depends upon that.

Investors should also remember that the "average" consumer is not as sophisticated as widely believed - not everybody has the means to access digital content through their TV. For people who do not have the latest gear, a physical DVD has its advantages.

The End Will Come ... Just Not Right Away
It is true, though, that Coinstar will eventually face a point of market saturation. There are already almost 30,000 boxes hanging around in front of McDonalds (NYSE:MCD), Wal-Mart (NYSE:WMT), and Walgreen (NYSE:WAL), and it is likely inevitable that digital content will take a bite over time. Likewise, NCR's (NYSE:NCR) Blockbuster Express units will almost certainly get some business as well.

But that is not necessarily the end of the Coinstar story. As the name may remind investors, Coinstar did not start out in the DVD rental business - it started out with coin-counting kiosks, a business that is basically saturated and no longer a major growth driver. This will happen to DVDs too, but it is not like the kiosk idea is tapped out. Coinstar is trying out game rentals on a limited basis [likely not great news for Gamestop (NYSE:GME)], and the company believes there are other kiosk-able markets out there like cosmetics and beverages.

The Bottom Line
Even with the assumption that Coinstar revenue growth resets down to 4% very soon, it is possible to generate a price target in the high $40s. Of course, abject failure and obsolescence of the DVD kiosk format would make that 4% overly optimistic, but it is hard to see that happening in a world where Blockbuster hung on for a long, long time. If Coinstar can get some traction with those new kiosk concepts, to say nothing of competing with digital downloads, that 4% revenue growth objective could look quite low. (For related reading, check out Avoid The DVD Craze).

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

comments powered by Disqus
Related Analysis
  1. Still More Gains Ahead For Semiconductor Makers
    Stock Analysis

    Still More Gains Ahead For Semiconductor Makers

  2. The Days of BABA Are Upon Us - Ahead of Wall Street
    Stock Analysis

    The Days of BABA Are Upon Us - Ahead of Wall Street

  3. Big Week for Fed Prognosis - Ahead of Wall Street
    Stock Analysis

    Big Week for Fed Prognosis - Ahead of Wall Street

  4. Tepid Market Waters Across the Globe - Ahead of Wall Street
    Stock Analysis

    Tepid Market Waters Across the Globe - Ahead of Wall Street

  5. Fed to Play 'Kick the Can'? - Ahead of Wall Street
    Stock Analysis

    Fed to Play 'Kick the Can'? - Ahead of Wall Street

Trading Center