Is Coinstar Still a Buy?
Howard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Coinstar (NASDAQ: OUTR), founded in 1991, started off with kiosk machines that would exchange coins for either cash or gift cards for various companies. They quickly gained the graces of the Federal Reserve for bringing coins back into the economy, and through coordination with the Fed and the US Mint more and more Coinstar machines started showing up in local grocery stores. In 2009 Coinstar purchased the remaining shares of the DVD rental kiosk company Redbox from McDonald's. Redbox has proven to be a successful venture for Coinstar, accounting for most of their revenue. But with DVD rental sales declining, is Coinstar still a good buy looking forward?
Coinstar’s Current Business Model
Coinstar’s namesake of coin cashing machines is a self-operated money making machine. Taking $0.098 per every dollar in the US, Coinstar is able to operate these machines with an attractive 24% operating margin. With around 20,000 Coinstar kiosks this makes Coinstar over $400 million in revenue per year. Coinstar's second operation is the DVD rental kiosk Redbox. Rentals charge $1 or $2 per day and rent and return the DVDs from any kiosk. Operating margins for this system is less at 13%, still a good margin. In 2010 Redbox made up 27% of the DVD rental market, and by 2012 they controlled 44%. Redbox has come into the scene and is starting to dominate the market with no signs of slowing down. In the last year Redbox’s revenue has increased by 26%. With the purchase of Blockbuster Express kiosks Redbox got rid of one of their biggest competitors and opened up even more potential for growth. With an overall operating margin of 12% Coinstar has been able to grow its business 40,000 Redbox kiosks and 20,000 Coinstar kiosks. Since 2010 the EPS has risen from $1.63 to $4.17 in 2012, with estimates for around $5 in 2013.
What Is In Coinstar’s Future?
Coinstar is starting to introduce both its Redbox and Coinstar Kiosks to Canada. They are working alongside Wal-Mart and Safeway to install more machines in that country. In July of 2012 Redbox announced they were testing for their new service Redbox Instant, an online streaming service for which they've already made deals with Lionsgate, NBC Universal, Paramount Pictures, and others. Coinstar is teaming up with Verizon, which owns 35% of the venture. Also in sights for Coinstar is a service called Rubi, which are coffee machines. These will be self-operating machines that dispense cups of Seattle's Best coffee. Other ventures include Gizmo, which sells used electronics, and kiosks that will sell tickets for various events.
The Non-threat Competition
Redbox’s competition comes from the one large Blockbuster LLC. Blockbuster was bought in 2011 by Dish Network (NASDAQ: DISH) for $233 million after filing chapter 11 bankruptcy. Blockbuster was once the king of DVD rentals, with over 9000 stores at its peak. Now the rental company is down to only 500 stores in the US. Blockbuster has tried to change with the market with DVD by mail and kiosk services. These services, however, have not panned out; in 2011 Blockbuster Express kiosk were bought out by Redbox, and Dish stated in 2012 that their DVD by mail service would be scraped. In January Dish announced that 300 stores would be closed, and unprofitable stores would continually be closed. All of these signs point to Blockbuster being no threat in the DVD rental business.
Risks for Coinstar
The most obvious risk is the fact the DVD rental market is in decline. But there is no indication of how long it will take for streaming services to fully take over. Sales for DVD rentals declined 11% in 2011, which is not good since 75% of Coinstar's revenue comes from Redbox. Also, Netflix (NASDAQ: NFLX) has a solid hold on the streaming service. Redbox Instant will have a large hurdle to climb with Netflix’s 60,000 title selection. Netflix already has over 25 million users, so Redbox will have to bring something to the table that Netflix does not provide already. Coinstar’s management has also been in hot water before. In 2011 investors filed a lawsuit against Coinstar for not releasing information about Redbox. The COO, the president, and the founder of Redbox, Gregg Kaplan, are all also stepping down in 2013.
At a P/E of around 10 Coinstar is fairly priced right now. They are the leading man in the DVD rental business and they look to keep expanding their control of the market, even though the market is in decline. This makes Coinstar a good buy for at least for a few more years as they dominate DVD rentals. But looking ahead Coinstar might be a good play if they are able to make their streaming service profitable and continue to expand their business models.
Hjcranford has no position in any stocks mentioned. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!