Coinstar's 5 Key Drivers

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

In spite of the heavy short-interest in Coinstar (NASDAQ: OUTR), the company is steadily moving forward. The bearish sentiment on the stock doesn't seem to be factoring in some of the major growth prospects. The automated retailer has a number of growth drivers in its operating segments which can drive the company's revenues heavily in the future. 

1. Blu-Ray Rentals

Redbox’s DVD business made up 88% of Coinstar's total revenues of $575 million in the last quarter. As a result, the company's ability to gain and maintain market share is critical for the company's long-term success. Redbox has been making stellar progress in diversifying its revenue from only new DVDs; the company has made higher quality Blu-ray discs available to its kiosks.

As a result, Blu-ray discs contributed 14% of total Redbox revenues, and rental volume of Blu-ray discs surged 65% on a Y/Y basis in Q1 2013; they come with higher margins for the business well. Coinstar's management is projecting that Blu-ray revenues will contribute up to 16% of Redbox's revenue in 2Q13. 

2. DVD Market Share and Expansion

A large number of brick and mortar stores on the national scale and numerous local ones are closing down. DISH Network's (NASDAQ: DISH) Blockbuster is closing down stores left and right. DISH bought the Blockbuster video rental chain out of bankruptcy for roughly $320 million to use those stores to cross-sell its own services. However, that plan didn’t materialize very well.

DISH is unwinding stores in the U.S. and recently sold off numerous Blockbuster stores in the United Kingdom to a company with restructuring capabilities. As more physical stores go out of business, Redbox can gain incremental market share in the DVD business, while keeping costs low. 

Redbox started deploying a system which will enable the kiosks to hold more inventory in each kiosk without adding costs substantially. According to the NPD Group, Redbox had a 47.8% share of the physical rental DVD market in Q1 2013, which represents an increase of 2.5% from the previous quarter. Redbox is increasingly becoming the last man standing in the DVD rental business due to lower overhead costs, and entertainment content that is mostly fresh new releases. And as other firms scale down, Redbox will be able to capture more more market share. 

In addition, Redbox is planning a big expansion in Canada with the installation of 1,500-2,000 kiosks in 2013. The company's position in Canada is not big, but Canada is the third largest viewer of entertainment in the world, so the company's incremental growth can come from this relatively newer region. 

3. Coin and partnerships

The coin-counting kiosks of the company number over 20,600. And this business is signing up newer partnerships as well to fuel its growth. The company's management is hoping to install up to 850 kiosks in 2013, and some of that is through a competitor, TD Canada. In addition the company struck partnerships with leading payments provider, PayPal.

This relationship with PayPal will allow customers to access and load funds onto PayPal, which might drive more transactions as the service is gradually rolled out across all kiosks. Getting into business with big name consumer firms is a great stride for Coinstar, and would likely enable its same-store sales to grow more rapidly in the future. 

4. Redbox Instant by Verizon

The joint venture between Coinstar and Verizon (NYSE: VZ) is an effort by the companies to participate in the trend toward over-the-top video streaming. Redbox is trying to become a player in the increasingly crowded Internet video streaming business, as its DVD rentals business sees slower growth rates. The company is trying to make the service available to users across various platforms including Roku devices. Redbox Instant has been pondering over original content but that is unlikely to materialize in the near-term.

However, the company's goal is to focus on adding content that will generate new subscribers. Redbox will be keeping its DVD kiosk business in place while growing the online subscription video business, because the Redbox Instant service will provide redeemable credits for DVDs. Redbox Instant now has only 5,000-6,000 titles, which is only a fraction of what some of the bigger firms have, including NetflixAmazon, and Hulu, but big investments from Verizon and Coinstar can change that.

5. Video games

Coinstar's Redbox is seeing traction in the video games rentals business. The higher margin video game rentals made up 5% of revenues in the last quarter, and are expected to increase in the future. And the company is expecting higher rental volumes in 2Q13 as 11 new video games are rolled out in Redbox kiosks. Redbox's video games are rented out daily for $2 apiece, and it is a slight variation from leading video game rental providers like Gamefly, which provides monthly subscriptions.  

As games are played mostly by younger age groups, the pricing of Redbox is a lot more optimal. Gamefly is like the Netflix of video game rentals, but at a much higher price point based on tiers. Gamefly has more than 8,000 gaming titles and has been growing rapidly and is a profitable business according to its S-1 filings with the SEC, but hasn't taken the IPO route yet. And if Redbox pushes for a much bigger content base from video game publishers it can gain a lot of incremental sales from video games.

The bottom line

There are a few growth drivers in place for Coinstar, and the company is a profitable one with healthy levels of free cash flow. The company's management has a share repurchase program in place, which might drive the stock price higher as well. Some of the company's unproven business lines like the Rubi coffee machines, if successful, can do well for the company's top line revenues as well. Coinstar is trading at a forward P/E of 10, which represents a good entry point. 

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Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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