Avoid This Hot Stock

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Company Coinstar (Nasdaq: CSTR  )
Submitted By: TSIF
Member Rating: 99.95
Submitted On: 10/28/2011
Stock Price At Recommendation: $52.95

Coinstar Profile

Star Rating ***
Headquarters Bellevue, Wash.
Industry Specialty Retail
Market Cap $1.44 billion
Industry Peers Amazon.com (Nasdaq: AMZN  )
NCR (NYSE: NCR  )
Apple (Nasdaq: AAPL  )

Sources: Capital IQ (a division of Standard & Poor's), Yahoo! Finance, and Motley Fool CAPS.

This week's pitch:

Some investors believe that Coinstar, Inc will reap the rewards of Netflix (Nasdaq: NFLX  ) misfortune on the short term rentals. I previously noted that those Redbox dispensers are really popping up everywhere. Overall however, the DVD kiosk rentals is a limited business. Streaming and selection via other means will catch back up.

I believe Coinstar investors have put too high of a premium on the share price since Netflix's fall from grace. In this sentiment/environment share holders who are asking too much are the quickest to run when the company can't quite deliver what they want. Profit margins have been tight at sub 5%. P/B is 3.5. P/E "around" 20.

I don't think Coinstar is a bad business, and may have potential at the high $30's. It hit $40 four times in the last three months prior to the Netflix over upside correction.

Update after earnings: Coinstar "pulled a Netflix" with the announcement that it will raise rentals by $0.20. Not much in the scheme of life, maybe a $1 a week for a moderate user, but it's still 20% and the principle of the raise. It does demonstrate, however, that the content costs are rising and margins, despite the price increase will remain tight. Hard to say if they will lose/gain/net revenue on the price raise, I expect gain revenue slightly, but not [to] the level they need to [support] the current share price. The 11 Million shares short got away with this one this quarter and I think are safe. Growth for the quarter was weak.

Target for CAPS: Sub $44.

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The Motley Fool is investors writing for investors. Dan Dzombak has no position in any of the companies mentioned in this article. Pitches must be compelling, made in the past 30 days, and be at least 400 words. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple, Amazon.com, Netflix, and Coinstar and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.


Read/Post Comments (4) | Recommend This Article (6)

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 November 03, 2011, at 12:07 PM, chadscards1274 wrote:

    Toal lack of understanding of the difference between NFLX and CSTR.

    1. CSTR increased rates by 20% for the first time in 8 years. VS NFLX increased rates by 60% and this was not long after a rate increase from $8.99 to $9.99.

    2. NFLX is a subscription business where there is a commitment every month to pay for the service whether the service gets better or worse. VS CSTR is purposefully located next to places people have to go (like the grocery store) so that picking up a video is not a separate trip. There is also no commitment so if I use CSTR once a month that's fine if I use it 5 times a month that's fine too. With a subscription there is a break even where you have to use the service a certain amount for it to be worthwhile.

    3. CSTR Has beaten earnings the last 3 Quarters and is selling at a PEG of about .75 based on next years projected earnings. This is at a price of about $47 so to be "fairly valued" at a PEG of 1 the stock should be closer to $70. This assumes a P/E of 18 times next years earnings.

    Calling this a "hot stock" and making a NFLX comparision is just absurd. NFLX had to lose over 60% of it's value to get down near a future P/E the same as CSTR. Now here is something that will probably shock anyone reading this. I am long both NFLX and CSTR. While NFLX will pick back up there are hundreds of thousands of people who still use DVDs and will for a while. Making the same mistake that NFLX made and calling the death of the DVD is premature.

  • Report this Comment On November 03, 2011, at 12:59 PM, aelmer333 wrote:

    I totally agree. I quit NFLX - the service was awful and I never saw new movies on DVD coming out. They sat on my table and half the time never were sent back. The streaming had no newer movies and I like to see the new ones coming out. I LOVE Red box!!! It is right by the grocery store door. It is quick and easy. I drive by that store every day going to work and the gym. The service is great and I do not have all those fast wifi hookups nor do many people I know.

  • Report this Comment On November 03, 2011, at 2:49 PM, TSIF wrote:

    MHenage, if you read the first few sentences you'll note this is a weekly series with a canned title.

    My references to Netflix were in comparision to the price increase. Apparently the share holding users considered this meaningful as Coinstar is down 10% since they reported. I don't recall any comments about the death of the DVD either in the article.

    If you write a pitch as well (lengthy) as you write a rebuttal then you to can be used in the weekly featured article. I can assure you that pitches of the right length format are rare.

    I'd also be willing to bet that if one of your pitches was featured on the weekly that you'd argue with yourself in the comments.

  • Report this Comment On November 03, 2011, at 6:39 PM, kck5419 wrote:

    MHenage,

    I completely agree with you and thought you posted a very well written response

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