The Calm Movie Rental Investment
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I tend to look at Coinstar (NASDAQ: CSTR) like an unsung hero. The big, green coin sorting machines may not be the most technologically innovative, but they are efficient. Then there is Redbox, which gets ignored due to the market's fixation on Netflix (NASDAQ: NFLX). However, Coinstar is the safer investment in my opinion.
The pressure of nothing being the breakout growth story like Netflix allows them to take a more methodical approach. If Netflix were a person, I would say that Netflix cracked under the pressure during the whole mess back in September 15, 2011 when it cut subscriber outlook. It also tried to salvage the negative PR from its increase of prices related to the streaming service with minimal to no success. I am not sure you remember Qwikster, because I only saw it for about 1 day before the idea was scrapped. I will look at Netflix more near the end, but I wanted to emphasize that being out of the spotlight can be a good thing for the buy and hold investor.
Coinstar Focuses on its Business
The best thing a company can do for the share price on a long-term basis is focus on the business. The key to unlocking the value in a business is not to pander to wall street analysts or myopic shareholders. It is to build the business in the right way to ensure that it has long term viability and profitability. When I look at a company I do not mind a short-term bump in expenses in order to create new business or break into a new market. It is the big picture that matters, and whether a company can execute on their vision.
Coinstar's revenue since 2008 has been in an upward trajectory. It is good to see them recovering steadily. Their revenue is not subject to wild swings. This tells me that Coinstar has a very resilient market. Earnings per share have also seen the same upward trajectory. You do not want to focus too much on revenues, because out of control expenses can ruin even the best revenues. Notice no dips during the periods when Greece was scaring the pants off the world economy for both measures.
Coinstar impresses me with its growth strategy. The last earnings call gave me the impression that it is methodical about their growth strategy. It is not expanding at a breakneck pace. It increases its footprint carefully and allow things to settle before going crazy on the next thing. It also does what it can to acquire more locations, such as their acquisition of NCR. That acquisition was completely for cash, which I also like. Another piece of good news from earnings was that Redbox business increased nicely around 20%, but the original coin sorting business was up 4%. The original business is not diminishing, which is a good sign for long term growth. I like to see additional revenues, not replacement revenues.
I do have a problem with Coinstar's 0.6657 debt-to-equity ratio. I would like to see the amount of debt decline. Growth for the near-term should be organic, meaning financed from operations. Then I would like to see remaining cash used to reduce debt. Finally, I want a dividend. Coinstar's strategy is not one of explosive growth, which gives great stability. A dividend would be a nice way to reward shareholders for holding on. So I am looking for capital appreciation and a dividend increase.
Finally, Coinstar is not sitting idly with its coin sorters and movie dispensers. They are innovating in order to increase business. The two main initiatives for it is Rubi, a self-serve coffee kiosk, and Redbox Instant, getting them into the streaming market. Both of these are important moves for the company, though I am happier with Rubi than I am about about Redbox Instant. The new products deserve their own article analyzing them, and I shall do that soon. Redbox Instant is not really out the door yet, but Rubi will have 500 locations by the end of the year, according to the last earnings call linked above. Both projects have big partners. Rubi is with Seattle's Best, a unit of Starbucks, and Redbox Instant is with Verizon.
Coinstar's Success Lies in what Netflix is Not
Coinstar is lucky that it does not get all the attention. It has been quietly chugging along. I first noticed Coinstar when it was in the low $30s. I wrote about the story of my discovery of Coinstar on my website. The crux of the story was that I was a loyal Netflix subscriber using the Redbox at my local supermarket, and it got me wondering how many casual movie watchers would rather use the $1.20 a day Redbox at a place they go to very often. The 20 cent price increase should not be too much of a problem. There is a benefit of being late to the price raising game, and doing it on a very small amount. Consumers see a 20 cent increase, not a 20% increase. Coinstar recently was at $70, and now is in the low $50s. It presents a good opportunity again.
The key in my mind is the casual movie watcher. I am a bit of a movie junkie. I watch movies all the time, sometimes I watch them more than once. I have seen Clue like 90 times. I very quickly learned that this was not the norm. Most people occasionally watch a movie, and people with families have the occasional movie night. They also watch the newest movies, so Netflix's large selection is not a draw for them. They head to the supermarket once or twice a week anyway. What would be the better deal for them, an ongoing subscription to Netflix which costs $7.99 per month, or grabbing a $1.20 a night movie at a Redbox? For the casual movie watcher the choice is probably Redbox.
There are many more details and it is easy to point out mild inconveniences that Netflix overcomes, but the greater point for me is that Redbox has no barriers to entry. With Netflix you have to set up an account, with Redbox you pick a movie and swipe your card. There is also no penalty for not using your subscription. In a rough economy, reducing fixed household costs like a Netflix subscription is probably at the top of the list. However if you spend a night in, a movie is usually one of the common activities. This is all in relation to physical disks. Obviously, streaming is another animal and Coinstar is not currently a competitor in the streaming market. It is moving into streaming, and I expect they will have some issues. I will be watching to see if Redbox Instant eats too much into profits. I like the physical business model, and remain skeptical of this foray into streaming.
Netflix is not a bad investment, but I see it as less of buy and relax investment. Netflix has been uneven lately, and I worry about its subscription base. Streaming is becoming a crowded market. I subscribe to Netflix for the physical disks, but Redbox erodes this business even if it does not outright kill it. Netflix's revenue is also on an upward trajectory, but its earnings took a hit. Also notice the free cash flow difference between Coinstar, $101.13M, and Netflix, $16.05M. If I want a less stressful investment, I am going with Coinstar. Read up on Netflix's last earnings call here.
With Coinstar's recent decline, it presents a good entry. It might retake $70 soon, but I really believe it will become a dividend stock with time. You can sell some of your shares when it ramps up, and keep a core position. The dividend might come after the stock deflates a bit and management wants to mix it up, then you can take your profits and buy a bit cheaper and start collecting a dividend. I will be looking at this over the next few weeks. Perhaps a better entry will present itself.
TheArchivist has no positions in the stocks mentioned above. The Motley Fool owns shares of Netflix. Motley Fool newsletter services recommend 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.