You're Kidding Me Right?
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I never cease to be amazed how in today's market good news can be misinterpreted as a negative surprise. Coinstar (NASDAQ: CSTR) recently reported earnings that by all accounts should've caused the stock to stay where it was, or possibly increase on good news. Instead what investors were treated to a drop; from over $70 a share down to current prices of around $45 per share. In reading through the earnings report, I honestly don't see what all the sellers were so panicked about. Let's take a look at the company's two main divisions to see how they did, and then decipher if there's opportunity from the decline in the stock price.
Coinstar actually could rename itself Redbox, as over 86% of revenues and nearly 78% of income is derived from this one division. This is good news to those who understand the company, as Redbox is growing revenue and income at a significant pace. While Coinstar's overall revenue increased 22.29%, and adjusted EPS was up 13.27%, the Redbox division handily beat both of these numbers. Redbox saw revenue growth of 25.86%, income growth of 31.57%, and same-store sales growth of over 16%. In addition, Redbox grew new kiosks by 15.6% year-over-year, and now has over 38,000 in operation. I've written in the past, that this is a small percentage of the company's total addressable market, so investors shouldn't assume that this division's growth will slow down going forward. I've read multiple articles suggesting that the DVD is being replaced by digital media. While longer-term this will likely occur, assuming that this is happening doesn't make sense, given Redbox's 7.4% increase in rentals over the last year. While Redbox is the most important growth driver for Coinstar, the company's namesake brand struggled a bit in the most recent quarter.
Coinstar represents less than 14% of revenue, but roughly 22% of income. With revenue growth of just 3.93%, and income down 9.82%, this could be the reason investors were quick to dump Coinstar shares. However, this seems a bit shortsighted as this division did see a positive increase in same-store sales, and an increase in the average transaction size. In addition, the company has recently struck a deal with eBay's PayPal unit to allow members to both withdraw from and deposit to their PayPal accounts using Coinstar machines. With over 20,000 kiosks in operation, one could argue this represents one of the largest “ATM like” agreements in the financial industry. In addition, investors selling Coinstar at this point are completely overlooking two of the company's growth drivers going forward.
The company recently announced its Rubi coffee kiosks featuring Seattle's Best, would begin rolling out in the third quarter, with about 500 installations by the end of the year. The Seattle's Best division of Starbucks (NASDAQ: SBUX) is a well-known brand-name, and could allow Starbucks to gain access to multiple non-traditional coffee selling locations. Coinstar believes this concept can grow to over 15,000 machines, which means the company's profits in the coffee industry are just getting started. While this partnership with Starbucks should add a caffeinated kick to Coinstar's growth rate, what truly is the future of the company is Redbox Instant.
For those who aren't aware, Coinstar and Verizon (NYSE: VZ) have formed a joint venture called Redbox Instant. This venture is 35% owned by Coinstar and 65% owned by Verizon. The difference between this venture and companies such as Netflix (NASDAQ: NFLX), is this venture seeks to offer both current titles through the Redbox kiosk system, and instant streaming all in one package. While some might argue that Netflix already offers this between its DVDs and streaming package, Netflix has made clear its intention to all but give away its DVD subscribers. In nearly every earnings release or press report, Netflix is being referred to as a streaming company. The significant and continuing decline in DVD subscribers shows that the company is not putting forth the effort to maintain this business. This is a tactical mistake and Redbox Instant looks to fill the void. With over 38,000 Redbox kiosks, chances are a location is very close to most people in the United States. Current movies and unlimited streaming is an offering that does not exist in this space currently. Though companies like Amazon.com (NASDAQ: AMZN) are constantly adding to their streaming titles, in order to get more current movies customers would have to pay for them individually as a purchase rather than as a rental. In addition, Amazon will likely never get to the point of offering newer movies in the same way that Redbox can through their kiosks. Beyond the potential growth in these new industries, Coinstar is making significant progress in improving their financials to the betterment of shareholders.
In the most recent quarterly report, the company maintained its lower long-term debt at less than 50% of last year's balance. Secondly, operating cash flow increased over 24%, and free cash flow came in just over $100 million. In addition, the company repurchased over 73,000 shares at an average price of $58.20. Considering that the shares sell for closer to $48 at the current time, Investors have the opportunity to pick up shares for about $10 less than management just paid. What's really amazing to me is the relative value that Coinstar shares offer compared to their two primary competitors.
At current prices, Netflix has a forward P/E ratio of over 50, and to get this number you have to use 2013 estimates. This is a company currently expected to grow at about 15.57%, which means investors are paying over three times the company's current growth rate. Amazon, on the other hand, sells for a P/E ratio of over 270, and is expected to grow at 34.44%. Even if you use 2013 estimates, investors are paying over 85 times the company's expected earnings. Even if you use 2013 earnings, investors are paying 2.5 times Amazon's expected growth rate. Coinstar, which is expected to grow at over 18%, sells for a forward P/E ratio of about 10. You can clearly see by this comparison, that Coinstar is being valued at a significant discount to its peers. For a company that has beat earnings estimates each of the last four quarters, is buying back shares, and is significantly free cash flow positive, this just doesn't make sense. This is why when I looked at Coinstar's stock price after earnings were released, my first thought was, “you’re kidding me right?”
MHenage owns shares of Verizon Communications. The Motley Fool owns shares of Amazon.com, Netflix, and Starbucks. Motley Fool newsletter services recommend Amazon.com, Netflix, and Starbucks. 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.