Coinstar: A Good Buy?

Ishfaque is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Automated retailer Coinstar (NASDAQ: OUTR) seems to be quite a favorite amongst the short-sellers. Roughly 45% of the company's outstanding shares are sold short, by investors who remain overly skeptical about the company's prospects.

However, the disc rental business seems to be doing well for Coinstar as it expands beyond DVDs to higher quality Blu-ray discs as well as video game rentals. The company's strategy remains focused on introducing newer products into its core automated retail business

Redbox Doing Well; Video Game Rentals A Big Opportunity

When most people think of Redbox, they think movie rentals only. But the company seems to be introducing newer offerings, to diversify away some of the risks from the proliferation of Internet-based streaming. The Redbox segment grew its revenues at solid rate of 22% on a year-over-year basis.

The number of Kiosks increased substantially from a year ago and ended 2012 with 43,700. Growth in the number of kiosks was in part, attributable to the acquisition of a large number of kiosks from another technology-based company, NCR (NYSE: NCR).

However, aside from inorganic growth stemming from the NCR asset acquisition, Redbox's same store sales growth stood at a respectable 10.2% for 2012. And the net Kiosk revenue per rental increased a solid almost 12%, and ended F'12 with $2.55 compared to $2.28 in F'11.

This healthy increase in revenue per rental was mainly driven by the increase in the daily rental fee, as well as increases in Blu-ray and video game rentals, both of which have higher daily rental fees. Video game and Blu-ray rentals now make up more than 10% of total rentals, and the company intends to strategically grow these opportunities.

The video game rentals business has a lot of growth opportunity as users will be more willing to rent-out a video game, before buying a pricey game. And substantially diversifies the company's revenue base and dependence on movie-based rentals alone. Also, Blu-ray discs are more profitable for the company, as they command higher rental fees as well as provide better quality video for the consumer.

Coin Counting Business Facing Headwinds 

Coinstar's coin counting business increased its revenues by 3% mainly due to an increase in the number of kiosks which increased by roughly 100, and ended 2012 at 20300. However, the operating margin for the segment in 2012 stood at 21.7%, which is lower than the operating margin it generated in 2011, which was 24.5%.

And also, the same store sales declined by 0.1%. It is pretty evident the coin business is feeling the heat of increased competition. The number of transactions increased slightly year-over-year, but mainly due to the new kiosks installed in 2012. And the average transaction size stood at $39.30, which is slightly higher than the 2011 transaction size of $38.80. 

This decline in same-store sales can be attributable to the increased competition from many large supermarkets as well as many banks that operate their own coin-counting services, and often times for free especially in the U.S. However, the coin business operates in a few international markets as well like UK, Ireland, Canada, Puerto Rico etc. But competition for this segment is likely to remain strong.

Absorbing the Competition

One of the better moves by the company was the acquisition of a number of assets from a competitor in the space; NCR Corp. Redbox acquired roughly 6200 active kiosks from NCR's entertainment business which included DVD kiosks, retailer contracts, as well as DVD inventory from NCR by paying roughly $100 million. 

The company did convert a majority of NCR's kiosks into Redbox kiosks, as well as gotten into a partnership to receive hardware, software and other services from NCR.

Since NCR’s core focus wasn’t around the DVD rental business, NCR decided to sell-off these assets. But the real strategic benefit goes to Redbox, as it reduces the competitive threats stemming from NCR's entertainment business line, as well as growth in the number of kiosks. 

Expanding the Breadth of Offerings

The company's management is very experimental, and is keen to try out newer ventures and business lines. Coinstar is launching Rubi, which is single cup coffee via vending machines. This Rubi initiative is in partnership with Seattle's Best Coffee, and will be rolled out in the form of kiosks in various grocery and merchant channels.

The major new initiative for the company comes in the form of Redbox Instant, which is the company's joint venture with Verizon (NYSE: VZ). Under the agreement, Verizon will be holding the majority stake in the company with 65% ownership, and Redbox will hold the remaining 35%.

The Redbox Instant just launched and offers subscription based on demand video streaming, along with DVD rentals from more than 42000 DVD kiosks. This makes a great partnership between these two companies as Verizon's cloud technologies and sizable on-demand content library along with Redbox's brand name and physical presence might make the venture a strong force in the online video streaming space. 

In addition, Coinstar is also testing concepts like refurbished electronics and self-service photo booths in some markets. Also, the company launched Redbox Tickets to allow customers to purchase tickets at numerous live events and attractions, and is expected to gain more consumers down the road. 

Going Forward

Coinstar has been steadily growing its top line, as well as bottom line in the last few years. The company is approved to repurchase up to $380 million worth of shares as of Jan-2013, which should drive its EPS in this year. Wide-spread consumer adoption of its video streaming initiative, as well as newer products at its self-service kiosks will be important in driving the company's fortunes going forward.

Ishfaque Faruk 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!

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