Coin counter, games of chance purveyor, and movie rental maven Coinstar (NASDAQ:CSTR) will report first-quarter 2007 financial results on Thursday, May 3.

What analysts say:

  • Buy, sell, or waffle? Of the 11 analysts covering the Motley Fool Hidden Gems recommendation, four of them rate it a buy. The remaining seven say hold.
  • Revenues. Revenues are only expected to inch up 3% to $130 million.
  • Earnings. Profits, meanwhile are expected to drop like a toy dangling from a coin-operated crane, falling some 40% to $0.09 per share.

What management says:
The analyst expectations for Coinstar fall right in the middle of management's guidance given at the end of the fiscal year in February. Yet even at the high end, it represents a significant ratcheting down of the company's growth rate, which for the past two years had increased revenues at a rate of 19% and 145%, respectively. CEO Dave Cole, however, expects the company to achieve the same kind of growth for the year as it did last year when it reported 16% growth in revenues. "We anticipate similar results in 2007 as we realize the ongoing efficiency that comes with national scale and a turnkey, 4th Wall management solution."

What management does:
As Coinstar has grown in size, and the diversity of its businesses has increased, revenues have been growing commensurately. However, a lot of that growth has been achieved simply through acquisitions; organic growth, such as that in the entertainment services division, has otherwise been flat. While crane-operated machines had been the primary driver of revenues for years, coin counting and e-payment services have about matched the entertainment revenues and will probably soon supplant it in importance. Yet with all of the growth and expansion, costs have increased, primarily in administrative areas, and that has served to eat away at profits.

Margin

12/05

03/06

06/06

09/06

12/06

Gross

32.8%

32.8%

33.3%

33.6%

33.7%

Operating

10.4%

10%

10.3%

9.9%

9.4%

Net

4.8%

4.5%

4.1%

3.7%

3.5%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
The vaunted "fourth wall" strategy of Coinstar allows it to continue to make new offerings that seemingly do not complement each other. Crane-operated games? Coin counting machines? Movie rentals? In reality, they make use of space that retailers would have otherwise considered dead area. Instead of fire starter logs and windshield wiper fluid, a supermarket can now offer coin sorters and Redbox movie rental kiosks -- Coinstar's joint venture with McDonald's (NYSE:MCD) -- that make their stores become a destination point. As Coinstar continues to cement deals with national merchants like Wal-Mart (NYSE:WMT), the chance for multiple offerings should increase revenues and profits, particularly in light of the repeat business a supermarket generates, for example.

Will Redbox ever become a real threat to Netflix (NASDAQ:NFLX) or Blockbuster (NYSE:BBI)? Probably not, since the titles offered are limited to the current most popular avenues. But that's not necessary either. It can continue to offer incremental growth and provide an opportunity to place additional services which can generate more profits.

Related Foolishness:

Coinstar has earned a one-star rating from Motley Fool CAPS, the new investor intelligence community. You can add your voice to the new stock rating service by joining today. It's free!

Coinstar is a recommendation of Motley Fool Hidden Gems. Netflix is a recommendation of Motley Fool Stock Advisor, and Wal-Mart is a Motley Fool Inside Value pick. Whatever your investing style, The Motley Fool has an investing service geared toward you!

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.