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Is Coinstar the Perfect Stock?

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Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Coinstar (Nasdaq: CSTR  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Coinstar.

Factor What We Want to See Actual Pass or Fail?
Growth 5-Year Annual Revenue Growth > 15% 26.2% Pass
  1-Year Revenue Growth > 12% 34.5% Pass
Margins Gross Margin > 35% 29% Fail
  Net Margin > 15% 3.5% Fail
Balance Sheet Debt to Equity < 50% 84.5% Fail
  Current Ratio > 1.3 0.94 Fail
Opportunities Return on Equity > 15% 17% Pass
Valuation Normalized P/E < 20 21.69 Fail
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
  Total Score   3 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

With just three points, Coinstar doesn't look too perfect. The company that brought you storefront coin-counting machines has gone well beyond its roots, but where it goes from here is far from clear.

Coinstar is famous for letting customers bring in jars of coins to have them counted at lightning speed. Yet even though the company has tried to liven up that business over the years by offering to waive fees for customers willing to accept gift certificates from, Starbucks, and other retailers, the company's higher growth future relies on its Redbox video rental kiosks.

There, though, the company runs headlong into archrival Netflix (Nasdaq: NFLX  ) , whose DVD delivery and video streaming represent a more convenient solution for many customers. And with Coinstar joining Netflix in accepting 28-day release delays of new movies, Coinstar has no corresponding competitive advantage in movies.

In its strong quarterly results in late April, Coinstar announced a possible way forward: video game rentals, where Netflix hasn't really ventured. If Coinstar can deliver on its management's promises of higher guidance for the second quarter, then its stock could get a lot closer to perfect soon.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Add Coinstar to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended Netflix, Starbucks, and, and have also recommended buying puts in Netflix. The Motley Fool owns shares of Starbucks. 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 Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 17, 2011, at 2:36 PM, Lauralc9 wrote:

    "And with Coinstar joining Netflix in accepting 28-day release delays of new movies, Coinstar has no corresponding competitive advantage in movies."

    I have to disagree. A large % of the Netflix library does NOT stream instantly. So Coinstar has the advantage of instant gratification. That's not to be taken lightly.

  • Report this Comment On May 17, 2011, at 10:13 PM, kck5419 wrote:

    I have had a subscription to Netflix for over a year and I am going to cancel and go back to Redbox. Netflix makes it impossible to get your moneys worth unless you want to watch alot of old movies. They treat you very good for the first couple of months by having new releases available to you but then it becomes very hard to get a new release. There is always a very long wait for new releases so they send you movies that are way down on your list. Also if you live away from a distribution center the turn around time for rentals is unbearable and without Saturday mail it will only be worse. It got to the point that I would feel like I had to watch the movie the night I received it so I could get it back in the mail for the 3-5 day turn around depending if it was a weekend involved or not. It really took the enjoyment out of watching movies and made it feel more like a chore.

    I want to enjoy watching movies again and watch them when I want to so I am returning to Redbox.

    I can't be the only person who feels this way so I have great faith in Coinstar stock.

  • Report this Comment On May 17, 2011, at 10:38 PM, StupidityAlert wrote:

    Dan, you will soon be replaced by an algorithm if you don't put on your Motley Fool hat and start thinking independently and critically.

    CSTR is currently a DVD kiosk company, who also happens to still have the coin kiosks, NOT the other way around. The key to a long-term investment in the company, of which the company is highly aware, is replacing the inevitable DVD kiosk sales decline with another hit or hits. At this point, you either believe they can do it or you don't. The stock is highly shorted, so evidently a lot of investors don't believe. But there is also a lot of money that thinks they can pull it off.

    You're welcome.

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