Is It Time to Buy Coinstar?

Coinstar (Nasdaq: CSTR  ) , best known for its coin-counting kiosks and as the parent company of the Redbox DVD/video game rental machines, is expanding its automated retail empire. In partnership with Starbucks-owned Seattle's Best Coffee, Coinstar will be rolling out 500 self-serve "Rubi" coffee kiosks in supermarkets and retail centers by the end of the year.

Coinstar has an incredibly high growth rate, trades for cheap multiples, and dominates the market's DVD rental segment. In short, it has a lot going for it. However, with the movie-rental industry in steep decline, Redbox won't suffice as Coinstar's bread and butter forever.

That's where the new Rubi kiosks come in. While they may or may not provide the ultimate long-term solution, this year's massive nationwide rollout signals that Coinstar is diversifying away from Redbox. Motley Fool retail editor/analyst Austin Smith emphasizes the key importance of this diversification, as well as Coinstar's ability to continue rolling out novel kiosk designs in the future.

Coinstar's self-serve kiosk-based business model has allowed it to rise to the top and continue to thrive in a sinking-ship industry. Netflix, on the other hand, is no longer the darling of Wall Street that it once was. But with a potential 600 million customers around the world, could it soar high again? Check out our premium report for both the bull and bear cases on Netflix. Just click here to start.

Austin Smith has no positions in the stocks mentioned above. The Motley Fool owns shares of Netflix and Starbucks. Motley Fool newsletter services recommend Netflix and Starbucks. 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.

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  • Report this Comment On August 30, 2012, at 5:59 PM, JohnZone wrote:

    Austin, of the skeptical arguments about Coinstar, yours make the most sense to me, an open-minded bull.

    My biggest concern among the skeptics arguments is this notion that DVD is on the way out. Having just minutes ago read " According to IHS Screen Digest, the United States video rental market is shrinking. It fell 7.3% in 2011, and is expected to fall an additional 6.4%, to $5.3 billion", I get it, yet ask you to consider this:

    I explain this decline in my mind with the theory that of course DVD has declined -- Block Buster has gone Bust, folks decided they didn't want to pay Netflix for BOTH streaming AND DVD by mail, so (like me) went with streaming since it is the same price point and way more convenient (and we know Americans will pay a premium for convenience and that that streaming is exactly the choice Netflix wanted us to make anyway); plus the combo of streaming, video-on-demand, Block Buster, and Red Box Kiosks put the local mom and pop stores that started out in the 80's renting 'please be kind, rewind' VHS tapes on the ropes and ultimately drove them out of business. Where is anybody going to get a DVD from these days even if they wanted one?

    What I would argue is that DVD use has gone down because supply has gone down, dramatically and rapidly. But, also that the % decline in DVD use does not match with the % decline of DVD stock that has recently evaporated from the market.

    The decline is supply and not demand driven. In comes Coinstar, which I argue is one of the last remaining channels for DVD. The reason they have such stellar earnings even in this 'declining' market is because the demand for DVD is being driven right into their bottom-line.

    For example, I love goat meat. There are only a few restaurants around here where I can get goat meat. If they all closed, consumption of goat meat will decline -- but I still want my goat meat.

    What you are seeing is not a decline in DVD use because folks are done with it, but because the industry decided they could soak consumers for more with streaming and we would just follow along -- offer competitive pricing for a few years while you drive those box stores out of business, then at the right moment, when they have been crushed, jack up the price and let the money flow.

    Red Box comes out of nowhere and disrupts that whole notion. Popping out vending machines of all things, to meet the demand that Netflix and the cable companies thought they could 'disappear'.

    I also like CSTR for all the other reasons you suggest -- low price, strong earnings, future looks good -- and especially because the SMT is not sitting on its laurels but continues to diversify and pursue new opportunities.

    I do think Rubi has a 50/50 chance of success. If the coffee sucks, then game over for Rubi. If it is great, then home run. But the odds are better than 50/50 really, because of course SBUX and CSTR know it better not suck. What I like is that Rubi has not yet been priced into CSTR and they are only rolling out an initial 500 units anyway so if it fails, they won't have vested too much -- but the stock will fall even though it wasn't even priced in, meaning yet another buy opportunity.

    Lastly, consider this: I can't stream the latest hit on my flight from New York to LA (heck I can't stream nothing), but I can pick up a couple of Red Box DVDs (and drop them off near my hotel on the other side) and I can't show up at my girl friend's door step with a big smile holding up my tablet streaming Hunger Games. But I can go to a Red Box kiosk, grab it for a buck twenty on DVD or Blu-Ray and head over. Point being, DVDs are great for a lot of things streaming sucks for, and I don't believe streaming alone will meet my or generally anyone's many needs and lifestyle the way DVD can. Streaming has it's place, Red Box has a monopoly.

  • Report this Comment On August 31, 2012, at 8:45 AM, TMFBWItime wrote:


    thanks for the comment.

    It's certainly an interesting company and could still have a bright future for a few years. One of the things that wasn't touched on in the video is that Coinstar is also entering into the streaming arena as well, so if DVDs do in fact die as many suggest, then they may still have an escape plan with their redbox business.

    They also have the ability with their workaround program to offer more relevant DVD choices before other streaming competitors at this moment.

    This company is just too cheap and has too much potential to ignore, and it's at the top of my watchlist today.

    Fool on!

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