Coinstar Gets No Respect – Part 2
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I've said it before, I'll say it again, Coinstar gets no respect. Here's the thing, ignore what you've heard, the DVD is far from dead. If you want proof, look at Coinstar's (NASDAQ: CSTR) recent quarterly report. I can't even count how many articles I've read saying that Netflix (NASDAQ: NFLX) should kill off its DVD division because everyone is going to be streaming videos anyway. Someone failed to tell that to the millions of people using their local Redbox machine. Oh, and that whole streaming threat, yeah Coinstar has something up its sleeve for that too.
As recently as the beginning of this year, Coinstar ranked #6 as the most shorted stock in the market based on the number of shares sold short. Well I'm not really sorry for the short-sellers, because I told you this would happen. The fact that the stock has risen from about $45, to its current level of $64.10 should be no surprise. While I agree that streaming is convenient, the selection that streaming offers, just isn't enough to make most people give up on DVDs and Blu-rays. If you want proof, consider that Coinstar (think Redbox) just reported revenue up 34%, and EPS up 258.7%. This huge growth came in large part, on the back of the company's Redbox machines. So just how well did Redbox do? Read on to find out.
You couldn't ask for a better quarter from a company's biggest division. There is no denying that Netflix essentially is giving away its DVD members to Redbox. Netflix saw runoff of nearly 20% and 9.6% in the last two quarters. During this same timeframe Redbox saw a jump in growth, this clearly isn't a coincidence. Redbox revenues rose 38% year-over-year, and operating income was up 221.9%. This was driven by an increase of over 15% in the number of kiosks from last year, and a mind-blowing 28.1% jump in same store sales. I would venture to say if you found a restaurant or another retailer with 15% new stores, and 28% growth at existing stores, the shares would be bid up to the stratosphere. The fact that the number of rentals grew by 19.4% and revenue per rental was up 16.7% is equally impressive.
When it comes to the Coinstar segment of the company, it might be the namesake, but it isn't at the same level as Redbox. With revenue up 5.6% and income actually down 17.1%, the company has some work to do. The fact that the company grew the number of kiosks 7.4% over last year, and total transactions were up 5.3% is worrisome given that this turned into negative income growth.
Two New Ventures
Coinstar the company has a new division, appropriately called New Ventures. This division encompasses new kiosk concepts that the company is trying out. These new concepts are in the area of coffee, refurbished electronics, and photo self-service. In my opinion the coffee concept has a lot of promise. With Coinstar's experience with self-service kiosk from the Redbox division, this is also an area the company can expand into multiple markets. I've written in the past that one of Coinstar's largest potential markets could be making big box retailers more space efficient. With items like CDs, DVDs, and video games, large retailers could take up much less space and still offer the same selection by installing kiosks to vend these items. Rather than taking up aisles and aisles of room, put these items in a few kiosks and be done with it.
The second new venture has gotten a lot of press, that is the LLC that Verizon and Coinstar created to compete in the online streaming video segment. The Redbox division owns 35% and Verizon owns 65%. This seems to be a great arrangement, because both companies generate free cash flow and should be able to pay up to compete with the likes of Netflix and Amazon.com (NASDAQ: AMZN). The fact that this service will be combined with selections from the over 30,000 Redbox locations will give customers a greater selection than other services. One item to be aware of is that this joint venture is having a unique effect on Coinstar's earnings and cash flow. Because of the way the company is accounting for income and expenses, this venture increased income by $15.159 million this last quarter. The offset to this amount decreased reported cash flow by $15.159 million. I point this out because if you weren't aware, it looks like Coinstar generated significantly higher earnings, and slightly lower cash flow. In fact, the company did generate substantially higher earnings, but in fact operating cash flow was up about 17% if you adjust for this accounting trick.
Last but not least, Coinstar made major progress in improving its balance sheet by cutting long-term debt nearly in half versus last year. This decrease from $359 million in long-term-debt to $176.6 million saved the company nearly 44% in interest expense in the last quarter. This gives Coinstar more flexibility and should positively contribute to future earnings. With Redbox generating huge growth, some promising new concepts on the horizon, and the Verizon and Redbox LLC getting underway, there is a lot to like about this stock. I own Coinstar shares personally, and it's one of my Top Picks on CAPSCall. Even after a 40% run from the beginning of the year, the fact that the stock sells for just over 13 times forward earnings is unbelievable. Compared to 35 times 2013 earnings for Netflix, and 90 times 2013 earnings for Amazon (two years out mind you), Coinstar looks like a bargain. Like I said before, this company gets no respect.
MHenage owns shares of Coinstar. The Motley Fool owns shares of Amazon.com. Motley Fool newsletter services recommend Amazon.com 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. If you have questions about this post or the Fool’s blog network, click here for information.