Concerns about Coinstar

By Keith Speights - June 9, 2012 | Tickers: AMZN, CSTR, CMCSA, SBUX, WMT | 0 Comments

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I’m bullish on Coinstar (NASDAQ: CSTR). I thought I needed to say that up front with a headline that includes the word “concerns.” Coinstar has enjoyed a great run so far in 2011. My expectations are that it will continue to do so throughout the year.

But we can view a stock positively yet still have concerns. Have you ever bought a stock and truly had no concerns whatsoever? I haven’t. Here are my concerns about Coinstar - and why I’m still bullish despite them.

Growth of Video-on-Demand
My first concern is that video-on-demand (VOD) will curtail the growth of Coinstar’s Redbox business. One primary reason this hasn’t already happened is that VOD costs are several dollars higher than Redbox.

For example, the relatively new Xfinity Streampix VOD service from Comcast (NASDAQ: CMCSA) typically charges $4.99 to $6.99 per movie. Amazon (NASDAQ: AMZN) online video rentals usually cost between $2.99 and $3.99 - or less for Amazon Prime members. Renting a movie from Redbox only costs $1.20 per day.

What would the result be if Comcast, Amazon and others lowered their prices, though? If they did, Redbox would be wounded. As competition increases in the VOD market, the possibility of lowered prices is real.

The bigger factor working in Coinstar’s favor right now is that new releases are available more quickly for DVD rental than they are for VOD. There have been some recent signs of movie producers slowing availability to DVD rental companies while making new releases available for VOD sooner than in the past. If this becomes the norm, it won’t be good news for Coinstar.

Competition from Retailers
Coinstar receives a large percentage of sales from kiosks located in the stores of three major retailers. Wal-Mart (NYSE: WMT) alone accounts for 17.5% of total sales.

Maybe I’m being paranoid, but I suspect some Wal-Mart executives have looked enviously at the revenues that Coinstar is generating renting many of the same videos that are for sale in their stores. Granted, Wal-Mart and the other retailers make money from allowing the kiosks in their stores. But how difficult would it be for Wal-Mart to implement its own video rental service and capture all of those dollars?

I am not aware of any plans by the big retailers to embark upon such a path. It is probable, though, that Coinstar management has considered this threat. They realize that any such action by Wal-Mart or the others would be disastrous for Redbox.

Failure of New Ventures
A new business segment, New Ventures, was established by Coinstar in 2011. One product from New Ventures is already making a splash. Coinstar announced recently an agreement with Starbucks (NASDAQ: SBUX) to sell Seattle’s Best coffee in kiosks at airports, grocery stores and malls. Other products for New Ventures include kiosks that sell refurbished electronics and provide photo self-service.

My concern isn’t really that these initiatives will be total failures. They probably won’t. I wonder, though, if they will be as successful as many people think they will be. A cup of coffee isn’t hard to come by in airports now - even Starbucks coffee. Many retailers already have coffee shops on site. How willing are they going to be to allow direct competition a few feet away?

Selling refurbished electronics and enabling photo self-service are great ideas, but I question how much growth these business will really provide. Also, there surely is some point of saturation that will be reached where retailers just say “no” to more kiosks taking up space in or outside of their stores.

Still Bullish
I have admittedly voiced what former VP Spiro Agnew might have called “negative nabobs of negativity.”  But despite my concerns I do remain positive on Coinstar overall for three main reasons:

1. The stock is priced so low that it should still go up even if the company doesn’t grow as quickly as most expect. Coinstar’s trailing P/E is 13.25 and forward P/E is 11.47. Its PEG ratio is 0.69. There is room for upward stock movement even if growth projections are off somewhat.
2. I expect Coinstar to continue its growth for the foreseeable future. It is firing on all cylinders right now. Management seems to know what it’s doing. Summer usually means more DVD rentals. Summer blockbusters could translate to future rental growth.
3. There is a reasonable chance that my concerns won’t materialize. For example, Coinstar is taking action on the VOD front by partnering with Verizon to offer nationwide broadband VOD services. I’m not sure how this effort will pan out, but Coinstar isn’t standing still.

While I like Coinstar, I’m not dismissing my concerns. They are valid, in my opinion. But concerns about any investment possibility must be weighed along with the positive prospects. It usually pays off to look at both sides of the coin.

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