Coinstar Counting on Future Growth

Although it's most closely associated with its big green coin-counting machines, Motley Fool Hidden Gems recommendation Coinstar (Nasdaq: CSTR  ) could just as easily be viewed as an entertainment company. Bulk vending machines and crane-operated amusement park games have typically accounted for 50% or more of revenues over the years, though they're not as profitable as the coin counters.

That may be changing. In addition to not being as lucrative, bulk vending and cranes have also been experiencing some lower sales volumes due to weaker foot traffic. That weighed in on Coinstar's fourth quarter, which was at the low end of management's guidance.

More exciting was Coinstar's investment in RedBox, a joint venture with McDonald's (NYSE: MCD  ) that lets customers rent DVDs for $1 a night. Revenues there were up 300% on an influx of new kiosk installations. RedBox comprises 90% of the category (Coinstar also has a joint venture with DVDXpress), and it expects to have 10,000 kiosks installed within three to five years.

While that's good news in terms of growth and acceptance if it actually happens, it's going to be hitting Coinstar's bottom line in the meantime. The coin-counting company had expected RedBox to be profitable by mid-2007, but instead now expects it to cost $4 million to $5 million this year in losses because of the ramp-up in new installations. As a 47% owner of the enterprise, it has to pay out its share of any expenses for these new installs, and such a huge increase will require Coinstar to be paying out a lot for the next few years.

The kiosk movie rental concept is an interesting one that would be a challenge to the dominance of online movie and bricks-and-mortar rentals, represented by Netflix (Nasdaq: NFLX  ) and Blockbuster (NYSE: BBI  ) , respectively. The $1 price point is attractive, and getting more kiosks into other locations will help, but the limiting factor seems to be on-hand inventory. Even with 50 to 60 titles and more than 500 copies on hand, will that be enough to drive rentals to make this a profitable endeavor?

It was a lackluster quarter that seemed to be putting in place factors which may help growth in the future. But the company's entertainment sector is sluggish, offsetting what should have been a better performance with its e-payment and coin-to-card or coin-to-e-certificate programs. Partnerships in the latter are growing, and the company expects Wal-Mart (NYSE: WMT  ) to give the green light on expanding the concept even further. Turning your change into a gift card or certificate could be what ultimately drives Coinstar higher.

Management didn't see its price as a particular bargain this quarter, as it engaged in no stock buybacks despite having a standing program in place. With a trailing P/E of 45 and a forward multiple of 32, it doesn't look like there will be any bulk vending of shares anytime soon, either.

Coinstar is a recommendation of Motley Fool Hidden Gems. See what Tom Gardner was counting on to make this company a winner with a 30-day free trial subscription. Netflix is a Motley Fool Stock Advisor pick, and Wal-Mart is a Motley Fool Inside Value selection.

Fool contributor Rich Duprey owns shares of Wal-Mart but does not own any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.


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