A License to Print Money

Of all the business models I've come across, my favorite has to be that of Motley Fool Hidden Gems pick Coinstar (Nasdaq: CSTR). There's something just so simple and beautiful about charging people to sort and count their change -- it's like a license to print money.

Of course, even the best businesses have ups and downs. The company was dealt a setback in 2003 when it failed to reach an agreement with its biggest customer, Safeway (NYSE: SWY), and Coinstar's machines were removed from the stores. Following this bit of bad news, Coinstar's stock fell 40% in just two days, and analysts were lining up to write the company's eulogy. Fast-forward one year, and Coinstar looks as strong as ever, pushing its way into new markets. If you had guts enough to buy the stock at the bottom, you're sitting comfortably on a double.

Coinstar's business model is evolving. Alyce Lomax pointed out previously that Coinstar is making strides to diversify its business model while staying relatively true to its core competency of turning spare change into revenue. The acquisition of American Coin Merchandising Inc. (ACMI) -- one of the nation's largest vendors of plush toys -- makes Coinstar a leading supplier of skill crane machines, with an installed base of nearly 167,000 machines. Toys and games are nice, but the real kicker in this deal is ACMI's relationship with an obscure retailer known as Wal-Mart (NYSE: WMT). Getting the lucrative coin-counting machines into Wal-Mart stores is the key to making this merger work.

ACMI's $235 million price tag was steep for Coinstar, which added $139 million of good will, and $235 million in debt, to the balance sheet. The updated 8-K filing shows the acquisition pushing Coinstar's debt-to-assets ratio over 50%. The $12.5 million in added interest expense was more than half the combined companies' net income for 2003, so the pressure is on to find synergies.

Coinstar claims the ACMI acquisition will add to earnings within 12 months, and the company is pursuing revenues in other new (and less costly) ways. Albertson's (NYSE: ABS) was the first partner to sign on for Coinstar's e-payment services in more than 1,800 of its retail and drug stores, and an agreement was penned to transfer cash from coin machines to prepaid Starbucks (Nasdaq: SBUX) cards. These agreements should drive increased use of Coinstar machines, and with nearly $68 million in combined operating cash flow last year, the company should take the added costs in stride.

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Fool contributor Chris Mallon regrets not taking the plunge on Coinstar's stock last year and doesn't own shares in any of the companies mentioned.