Could Shareholders Make a Buck if Coinstar's Sold?

Going private is a temptation for any company that feels it isn't getting enough respect from the stock market. This might just be the case with Coinstar (Nasdaq: CSTR  ) , the operator of the ubiquitous Redbox DVD rental kiosks fronting supermarkets and convenience stores throughout America. Published reports have it that the firm is in talks regarding a sale, most likely to a private equity group. Leading to the question: Would this be a boon or a bust for shareholders?

Breaking out of the box
It's not easy being Coinstar. Nearly all of the stock's value is tied up in the performance of Redbox, which accounted for around 86% of company revenues in its second quarter. This is a problem because investors consider the service to be behind the technology curve. It's hard to argue against that. The DVD format has been around for a decade and a half.

Streaming services, meanwhile, are the hot item offered by seemingly every company even vaguely involved in media. Witness, for example, the efforts by Amazon.com (Nasdaq: AMZN  ) to draft shoppers to its online movie/TV service.

Coinstar's trying to break away from its DVD kiosks. It's creating a video-on-demand service in partnership with mobile and TV provider Verizon (NYSE: VZ  ) , to be called Redbox Instant.

Coinstar seems to have a knack for sniffing out mass consumer tastes. In partnership with Starbucks (Nasdaq: SBUX  ) , it's aiming to build a Redbox-like network of coffee vending machines located in and near heavily trafficked retail stores.

Not pretty enough
However, despite these initiatives with solid, big-name brands, Coinstar is so heavily identified with the fading business of DVD rental that any shift in strategy is probably not going to impress the market. What's compounded this recently is the company's 2Q results, which slid compared to 1Q, although they represented a year-over-year improvement and were broadly in line with expectations.

An unforgiving market traded the stock down by $8, or 15%, the day after the results were released.

The punishment isn't necessarily unfair. Coinstar is not doing badly in terms of financials, despite the creakiness of the technology it still heavily relies on. But for a company like this to go anywhere in terms of share price it really needs to blow the market away with the financials it posts or the deals it signs.

It hasn't done either. Continued growth doesn't put Coinstar anywhere near Netflix (Nasdaq: NFLX  ) in terms of market strength and overall reach. Since the latter company is becoming more and more weighted toward streaming, all it needs is a good set of Internet pipes to grow its business. This is one key reason why it's had success recently expanding into technologically advanced markets like the United Kingdom and Ireland. Since launch of the firm's streaming service this past January, 1 million people in the two nations have already signed up as customers.

Coinstar, on the other hand, is hobbled by the physicality of Redbox's kiosks. The day-late-and-dollar-short streaming effort with Verizon won't alleviate this much. Redbox Instant is to be accessible only by subscribers of Verizon's FiOS fiber optic service. At the moment, that only amounts to 5.1 million people, while Netflix's streaming customers number 27 million.

And don't forget Amazon. It's relatively early days for that company's streaming, but the popular retail website has 152 million active customer accounts, and that doesn't count the more casual shoppers. Even if it only converted a fraction of these clients to streaming subscribers, that total number would still be considerable. And it would eat market share from the competition.

Also, FiOS is based exclusively in the U.S. Since Netflix and Amazon and most of their streaming ilk are Web-based, they have a clear advantage as far as international (and for that matter, domestic) expansion is concerned.

Coinstar's initiative with Starbucks is a clever and sensible move by a management team that seems to know what it's doing. Looking more closely at that business, though, brings up questions about its potential. Yes, the entire universe loves Starbucks, but does that necessarily mean that each CoinBucks (or whatever it's called) kiosk will have a line of coffee addicts sacrificing their pocket change for a drink?

Consider that Starbucks already has thousands of outlets in the United States. In many of our denser cities it's hard to walk three blocks in any direction without encountering one of the company's stores. Not only that, but the company has been aggressive in placing smaller versions of its outlets inside supermarkets and the like -- exactly the type of place a coffee vending machine is likely to be located. Starbucks is already ubiquitous and convenient, so it's hard to imagine that any automated coffee-making will bring in substantially more custom.

A little pop
Coinstar shares understandably rose a bit (by around 7%) when the sell-off rumors found their way online and in print. What investor doesn't like the prospect of a buyout, after all? The increase wasn't that substantial, though, and shares have traded at a fairly steady level since then. There don't seem to be many out there who feel that Coinstar will cash out at much of a premium.

Believers in its ability to deliver results from video on demand or from machine-delivered Starbucks might beg to differ. For these optimists, the stock could be an opportunistic buy at current levels. But that perceived value is only likely to happen at least several years in the future, when the company's more thoroughly weaned itself off those shiny silver discs. If that happens at all.

Like Coinstar, many believe Netflix is an also-ran given its relatively depressed share price. It's still a fascinating company, though, which is why we've produced a premium report on its prospects. Not only is this in-depth analysis a huge bargain at only $9.99, it includes a full year of free updates. As such, it's essential for any current or potential investor in the company. Download your copy right here.

Fool contributor Eric Volkman owns no stocks mentioned in the story above. The Motley Fool owns shares of Starbucks, Amazon.com, and Netflix. Motley Fool newsletter services have recommended buying shares of Starbucks, Netflix, and Amazon.com. Motley Fool newsletter services have recommended writing covered calls on Starbucks. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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

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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 August 21, 2012, at 6:25 PM, JohnZone wrote:

    I keep seeing repeated all over the place supposed 'analysis' of Coinstar that in one breath is comfortable saying both ". . .The DVD format has been around for a decade and a half" or "the fading business of DVD rental" and " Coinstar is not doing badly in terms of financials, despite the creakiness of the technology it still heavily relies on."

    That Coinstar's fundamentals are solid is clear, you can just look it up and see the revenue growth for yourself.

    That the DVD business is "creaky" is an assumption, and a weak one in my opinion.

    Nevermind that money talks cuz this baby generates plenty of it --but what about this BS that DVD is fading?

    I see it like this, Coinstar fills a vacuum created by the implosion of BlockBuster and so many of my local mom&pop video rental stores. My own demand for dvds is still there, and I subscribe to netflix streaming. The fact is, you can get the latest releases from RedBox that Netflix doesn't have. Fact is, I see people at RedBox kiosks everywhere I go. Not always, sure, but often enough to tell me there is demand (just seeing their balance sheet isn't enough for me). There are a lot of gaps in netflix that redbox fills, and it is a fast and easy service -- especially when you've watched all the great stuff on netflix and find yourself down to watching random cr*p just to pass the time.

    So, I argue this huge assumption that dvd is dead is wrong and based on nothing in fact. It has become the cool thing to say when you want to sound hip to technology, like dude, it is so obvious that streaming is where it is at. That is baloney.

    But hey, let's pretend the tons of cash redbox generates for a service that is -- what's the phrase of the month? Buggy Whip? Fine, Redbox has an answer to that in there partnership with VZ to stream video. They specifically have said their model with not be the 'a whole ton of junk no one wants to watch' model of netflix, but rather offer hundreds instead of thousands of movies -- but they will be movies you actually want to watch. I like that model.

    So, the problem with investing in CSTR is not CSTR it's people who for some reason keep telling themselves the dvd is dead instead of checking in with what they see in their own backyard and what is reflecting in actual revenue and EPS that has been increasing for YEARS.

    So, like, I don't take it personally, I just shake my head and write comments like this. I have managed to buy at the lows and sell on the highs this year (not a day trader, I've traded CSTR only three times this year) and I am (disclosure) LONG CSTR.

    If an equity firm comes in and relieves people of the opportunity to invest in this company because they want to follow the herd, buy the hype, and ignore reality -- all the more power to those visionaries.

  • Report this Comment On August 22, 2012, at 11:22 AM, MutualFundMonday wrote:

    MF should be embarrased and ashamed by the quality of this article. A complete lack of researching skills, and an extreme bias to the short side which probably reflects your current position.

    1) Redbox Instant will be available to anyone with a high speed connection.

    2) A significant amount of people in the U.S. do not have high speed connections and use Redbox as a means of movie watching.

    3) If Redbox Instant dominates Netflix after inception, shouldn't Redbox than command a higher P/E than NFLX based on growth??

    4) Last I checked, SBUX isn't on every street corner (well maybe downtown SF and Seattle), but the point being there is plenty of opportunity for middle America to have one next to the Dairy Queen, the Dollar General, the Wal-Mart.

    Next time, do more research before you bash a company with incorrect/incomplete facts.

  • Report this Comment On August 23, 2012, at 6:41 AM, TMFVolkman wrote:

    The facts in this article are verifiable and the assertions well supported. JohnZone, it's indisputable that DVD technology is now around 15 years old. Particularly in this day and age, that's a very long time for even the most versatile technology. This is one key reason why investors consider the format to be a dead man walking, and I'm inclined to agree with them. Streaming is still relatively new, plus not everyone has the internet pipes to support it. But that's going to change and when it does, there probably won't be a compelling enough reason to continue renting and buying DVDs.

    MFMonday, thanks for the compliments. You're certainly right about the lack of broadband but, as mentioned above, that's not going to last. As for Starbucks, take a walk around New York City and see if you still disagree with my assertions about the presence of the company. Even in fairly out-of-the-way places, there's usually one of its coffee shops somewhere in the vicinity.

  • Report this Comment On August 25, 2012, at 1:17 PM, JohnZone wrote:

    Okay, so it's true that DVD technology is 15 years old. I'm not actually arguing that point. What I don't understand is how that then leads to being something people won't use anymore because a new technology exists that is also very popular.

    According to OfficeMuseumDOTcom, "the first bent-wire paper clip was patented by Samuel B. Fay in 1867". We have hole-punch, we got those black clip things, we got staples, we got all kinds of ways to bind our paper together. Yet, 150 years later, the paper clip is arguably the most used binding tool to this day. Interested party's can google it, lots of fascinating info out there on the paper clip. My point is, being 15 years young doesn't equate to being obsolete.

    If the evidence you say is actually out there to support what you said, I don't see it in Coinstar;s revenue or earnings per share trend.

    I would think an obsolete product would have declining revenue and declining earnings per share, every year as it fades away. I'd also think the disrupting technology would show increasing revenue and earnings per share.

    Yet, both NFLX and CSTR show rising revenue and EPS just about every quarter as far back as I looked (to early 2009), in a clearly upward slope.

    So, when you say it is dead and creaky etc. I do not understand why, and I haven't yet been pointed to where I can go to verify your 'well supported' assertion to counter the numbers I'm looking at, and the behavior I'm seeing every day at the grocery store, pharmacy, and fast food restaurant. Someone hasn't told those people they don't really want DVD.

    Looking at a P/E of 10.36 for CSTR and 34.74 for NFLX and knowing CSTR is undervalued because of lack of faith in their model versus NFLX having well-known and embarrassingly public real internal issues, reading your article and weighing all the information I have . . .I'm still comfortably going to comfortably add to my long CSTR position before people come off the sidelines. Because being ahead of the curve is how I make money in stocks.

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