Dinner and a McMovie

By Jon Quast - August 10, 2012 | Tickers: CSTR, MCD, NFLX, VZ | 0 Comments

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 Do you remember the first time you saw one of those Redbox machines?  I sure do.  It was sitting out front of my local Mickey D’s.  Since the thing was red, I thought it was McDonald’s (NYSE: MCD) newest thing to tempt me.  I turned and looked at my wife and jokingly said “Wow, now I can get a McChicken and a McMovie.”

It wasn’t too long before I was hooked.  Being a broke person, renting a movie for a McDollar was way more appealing than going to my local rental store.  I would have tried Netflix (NASDAQ: NFLX) as everyone kept assuring me it was cheaper, but I honestly didn’t have enough disposable income to tie myself down to 10 bucks a month.  McDonald's made the decision even easier for me as they started giving away a free rental with a large drink.  So, I could get the large drink for $1.50 and take home a rental.  Score one for the good guys.

I remember wanting to get in on this company way back when, but Redbox was not a public company.  It seemed like literally every day, a new kiosk was going in somewhere.  Wal-Mart got one.  Two of our local grocery stores had them.  The company was growing like mad and I was going mad for not being able to get in on this revolution in the dvd business.  Thankfully Coinstar (NASDAQ: CSTR) did us afflicted wannabe investors a favor in 2009 when it bought the company out.  You can now get in on the action.

Growing Revenue

Recently, Coinstar reported their quarterly results.  You can read it if you like but here are some highlights:

• Revenue up 22% over last year
• Operating Margin steady
• Earnings per Share up 13%
• $100 million free cash flow

That is some pretty savory stuff right there.  Compare this with Netflix that only saw a 12% growth in revenue and it makes it even sweeter.

For the next quarter, analysts are hoping for revenue of $566 million.  That seems to be no problem for Coinstar's people as they are expecting revenue from $550-575 million.  For comparison, they pulled in $532 million this quarter.  

Plunging Stock

Just when you think you understand the stock market, something like this goes and happens.  Why would a good company, with good growth that is beating its competitors fall over 30% in a month?  If you said "because they were below analyst's estimates" then you should go buy yourself a Big Mac for a reward.  Yes, Coinstar missed analyst's estimates.  Here's the interesting thing though: they only missed the sales estimates.  They actually beat the earnings per share metric, which I think is more important anyway.

What's got people scared with "a below these analyst's expectations" is that Coinstar is considered a growth stock.  With growth stocks, they normally have huge P/E ratios (like LinkedIn at the moment) which is justified because of how fast they are growing.  But, if the company shows signs of slowing down, then the high P/E ratio is no longer justified and the stock plummets.

Here's what they aren't telling you: Coinstar's P/E ration is under 10.  That's how many McNuggets I get in a box!

Now that you know what Coinstar's P/E ratio is, I thought you'd be interested to see how they stack up against some large-cap companies.

If Coinstar's P/E ratio had been, oh I dunno, 60 or 70, then yes, I would concede a drop in stock price.  But it seems like the 30% drop in stock price over the last month is a little out of place.  These $200 billion companies I've thrown in here for comparison are not considered growth stocks by any means.  It doesn't mean that business isn't growing at all, just their businesses are a lot more mature and don't grow as fast as little brother.

foolish (little f) Arguments

I was reading an article that was talking about how dvds are dying and that Coinstar is going to implode when that happens.  It's true that some new technology always comes along.  Whether streaming video is the technology that replaces dvds is yet to be seen.  But let me make a point from history: it took dvds 10 years to kill VHS.  Twister was the first film on dvd in 1996, and it wasn't until 2006 that they stopped making VHS.  Yeah, I didn't think that seemed right either until I remembered my parents got me Star Wars Episode 2 on VHS.  I still can't find a VCR to watch it...

Also, don't count Coinstar out yet if the dvd is doomed.  They have entered an agreement with Verizon (NYSE: VZ) to stream movies via their license with Redbox.  Some mock and say that Netflix is the undisputed heavyweight of streaming.  You say that now, but I know a lot of Netflixers waiting for something just as good to come along.  Could that "something" be the duo of Coinstar and Verizon?  Also don't forget, there was a time when Netflix was ridiculed for having the gaul to take on Blockbuster.  We all know who won that one.

Foolish (BIG F) Takeaway

I think that Coinstar is a screaming buy at this price.  The dvd isn't going away anytime soon.  This is a fantastic buy and hold stock, and we just got ourselves a fantabulous entry point.  

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