Why Today is a Good Day to Buy Coinstar Stock

by on January 14, 2011

Coinstar (CSTR), the parent company of Redbox, had its stock “plunge” 24 percent today, after a preliminary announcement that its Q4 earnings didn’t meet expectations. Looking ahead, “Coinstar also has revised its initial outlook for full year 2011 and now expects revenue between $1.70 billion and $1.85 billion, adjusted EBITDA from continuing operations between $325 million and $355 million.”

That drop is probably an overly dramatic response, considering “[r]evenue from Redbox rose 38 percent in the fourth quarter, and same-store sales (an important metric for retailers) were up 12.5 percent,” as CNNMoney reported. They just didn’t meet very rosy expectations: “Coinstar’s biggest problem is they suck at guidance, not that their business is bad,” analyst Michael Pachter told CNNMoney. Redbox currently has about 28 percent of the rental market, and I wouldn’t expect that to dip much, if at all, near-term in response to streaming video access, due to the costs associated with and limitations to broadband access.

As it happens, Coinstar is a Bellevue company, and CEO Paul Davis was at the Met Grill yesterday afternoon, giving a presentation for the Met Grill’s “Guess the Dow” stockbroker participants. (More on that in a later post.) Davis spoke a bit about the pressure they’d gotten from major studios not to stock new movies in Redbox’s automated DVD rental kiosks the day they go on sale. Eventually, Redbox agreed to a 28-day delay, which effectively removed the 28-day advantage they had over Netflix up to that point.

As is common practice, Coinstar waited for the market to close to announce the downbeat earnings, so Davis didn’t let on at his noon presentation that anything was amiss. (Other than the dog-not-barking sound of not leaking good news just before it’s announced publicly.) Particularly disappointing for Redbox, since they traded rental delay for access to Blu-ray titles, was that demand for Blu-ray was not widespread, even at a $1.50 per day rate. (Redbox’s standard DVD rate is $1 per day.)

Now that the company has a better sense of its Blu-ray rental hotspots, it plans to reallocate its resources better. (You could also ask why a company based on bargain-basement rental prices thought so much of its clientele was flocking to buy the newest machine.) Redbox kiosks only hold about 200 titles, which was fine when they had the newest DVDs on the block, but without that first-mover advantage that limited selection clearly impacts them, as does dividing their offerings into standard DVD and Blu-ray.

Further, while Davis was clearly proud that customers could pick up a movie from any kiosk and return it to any other Redbox site–their “rent-and-return anywhere” is a registered mark–the good people at any rental car agency could have told them it’s a logistical headache to maintain optimum resource allocations with that practice in place.

The good news is that this quarter was a transition period for Redbox, and nothing here is unsolvable. Their main competitive advantage, of getting their movies in front of people as an impulse “buy,” remains. (Coinstar locations worldwide: 18,900; Redbox U.S. locations: 25,000, 50 in the greater Seattle area.) You can also, given the limited kiosk supply, now reserve titles online or via iPhone.

So does, interestingly, the amount of change in your penny jar. Davis says that each year, some $10 billion in change is sitting around, and of that, Coinstar sorts out some $3 billion. Yet since the early ’90s, when Coinstar got started, the total estimated amount of change out there has yet to dip appreciably. So there is still room for growth on Coinstar’s side of the equation.

If you haven’t used the service recently, you may not know that the Coinstar 9.8 percent processing fee is now an option. Thanks to agreements with retailers, you can take the whole amount as a gift card. There are more than a dozen participants so far, including Starbucks, Amazon, iTunes, Borders, Alberstons, Old Navy, and Lowes. (The stockbrokers voiced a desire for Costco to get in on this.) Or, you can designate a donation to a non-profit.

Davis was previously president of Starbucks’ North American Operations, so you may not be surprised to hear that Coinstar is testing a Seattle’s Best Coffee kiosk that offers $1 French-press-style cups of coffee. Another test subject is a kiosk that would purchase your old cell phone.

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