Coinstar Is Good But Business Rapidly Disappearing

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

Redbox’s emergence into the DVD market was perfectly timed, just as Blockbuster was falling.  Was it luck, or excellent management? Let’s take a look at Coinstar (NASDAQ: OUTR) and analyze its strengths, weaknesses, opportunities, and threats.

Strengths

  • Give Coinstar's management tremendous credit. They started off with a coin exchange machine, took those profits and reinvested in DVD kiosks that are close to ubiquitous through the United States.
  • Have a virtual monopoly on DVD rentals at this point.
  • They have low human overhead costs (kiosks are largely unmanned, aside of maintenance)
  • Raised DVD rental prices 20% and lost far less in terms of volume. Has also been able to squeeze out extra money from customers in their coin exchange business, thus raising net margins.

Weaknesses

  • DVD rentals in 2011 dropped 11% from the prior year.
  • Redbox Instant has late fees on borrowed DVD, something that is sure to turn off potential Netflix (NASDAQ: NFLX) defectors.  
  • Redbox Instant has 10% of the video streaming library of Netflix, and no TV shows. To get this Netflix subscriber to switch, they would have to seriously ramp that up. They also have competition in the streaming market from Amazon (NASDAQ: AMZN) Prime, which also has a larger video streaming library than Redbox Instant.

Opportunities

  • Has recently expanded its DVD and coin changing businesses into Canada.
  • Trying to expand into coffee dispensing via their Rubi machines which sell Seattle's Best brand coffee, as well as used electronics (Gizmo), a ticket event dispenser for which charges $1.00 per transaction, and an "ecoATM" where people can sell their old cellular devices for cash.
  • Recently there were 11.7 million shares sold short, representing 39% of the company's float.  Should better than expected numbers come in, the short squeeze will be on.
  • Coinstar/ Verizon (NYSE: VZ) partnership has created Redbox Instant. Leveraging Redbox’s DVD distribution which consumers get for only a few $ more a month, and on the same day they desire it, creates an alternative to Netflix. The base helps expand Coinstar’s base utilizing services already offered. Hard for Coinstar to lose in this proposition.   

Threats

  • Microsoft (NASDAQ: MSFT) has eliminated a codec for the basic version of Windows 8 that allows DVDs to be read by computers.
  • Probably the company’s biggest threat/ weakness faces is that fact that it is engaged in dying markets. No doubt, it has made a mint off of DVD rentals, and a good amount of change off coin exchange, but these are disappearing. We are becoming more and more a paperless society, and Canada recently stopped producing the most annoying of coin, the penny. I actually predict the U.S. will follow shortly. As for the DVD, Microsoft eliminated the codec, Netflix is planning for the future when they are 100% streaming. People have been adopting new technologies much more rapidly than in the past, and costs of doing so are rapidly falling.  

Bottom Line

Coinstar is a well-managed, innovative company, with good margins. The biggest question I have is why would I want to buy into a corporation whose products likely will not be used 10 years from now. Will they be able to innovate, and will replace the revenues of DVD rental and coin exchange which will be on the decline. 

This is a stock that I don’t believe Warren Buffett would consider, it doesn’t meet his criteria, and therefore the company does not have enough going for it to reach mine.

If you have a well thought out, rational, Calm response, feel free to leave a comment below.


margiecfl has a long position in Microsoft. The Motley Fool owns shares of Amazon.com, Microsoft, and Netflix. Motley Fool newsletter services recommend Amazon.com, Microsoft, and 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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