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Is Coinstar the Perfect Stock?

By Dan Caplinger - Updated Apr 6, 2017 at 9:50PM

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Finding companies that have all the right stuff can produce winners.

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Coinstar (Nasdaq: CSTR) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Coinstar.

Factor What We Want to See Actual Pass or Fail?
Growth 5-Year Annual Revenue Growth > 15% 26.2% Pass
  1-Year Revenue Growth > 12% 34.5% Pass
Margins Gross Margin > 35% 29% Fail
  Net Margin > 15% 3.5% Fail
Balance Sheet Debt to Equity < 50% 84.5% Fail
  Current Ratio > 1.3 0.94 Fail
Opportunities Return on Equity > 15% 17% Pass
Valuation Normalized P/E < 20 21.69 Fail
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   3 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

With just three points, Coinstar doesn't look too perfect. The company that brought you storefront coin-counting machines has gone well beyond its roots, but where it goes from here is far from clear.

Coinstar is famous for letting customers bring in jars of coins to have them counted at lightning speed. Yet even though the company has tried to liven up that business over the years by offering to waive fees for customers willing to accept gift certificates from Amazon.com, Starbucks, and other retailers, the company's higher growth future relies on its Redbox video rental kiosks.

There, though, the company runs headlong into archrival Netflix (Nasdaq: NFLX), whose DVD delivery and video streaming represent a more convenient solution for many customers. And with Coinstar joining Netflix in accepting 28-day release delays of new movies, Coinstar has no corresponding competitive advantage in movies.

In its strong quarterly results in late April, Coinstar announced a possible way forward: video game rentals, where Netflix hasn't really ventured. If Coinstar can deliver on its management's promises of higher guidance for the second quarter, then its stock could get a lot closer to perfect soon.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Add Coinstar to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Coinstar, LLC Stock Quote
Coinstar, LLC
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Netflix, Inc. Stock Quote
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