It's a small victory in a wider war. Coinstar's
A market that's hard to impress
The deal was good news for Coinstar. Same-day agreements are powerful inducements bringing customer to kiosk for movies that are fresh to DVD. Although this isn't a new arrangement for Coinstar and Sony, it's a win because the latter had had the option to back out of it this coming September. That it didn't indicates either confidence in Redbox or desperation for the struggling conglomerate. Either way, Coinstar benefits.
It needs such wins because many investors are skeptical about its future. Last week, the company reported 2Q results that would be the envy of most publicly traded firms. Its net profit surged by 38% over 2Q 2011's figure, while revenues advanced 26% in the same time frame.
Better results often mean raised guidance, and that was no different for Coinstar -- the company now expects full-year revenues of $2.21 billion-$2.31 billion and a bottom line of $4.60-$4.90 per share. Previously it anticipated taking in $2.16 billion-$2.28 billion and netting $4.40-$4.80 a share. This despite the $0.40-$0.50 per-share hit the company will take for its $100 million acquisition of the Blockbuster Express kiosks formerly owned by NCR.
But the market wasn't impressed by any of this. The company's shares promptly plunged, trading down the next day by a little over $8, or around 15% lower. The pessimism didn't stop there; in the following days, the stock dipped below $50, where it remains.
Outside the stream
The big reason for the skepticism and the decline in the face of such good news comes in a little red envelope. In other words, the company's bogeyman is Netflix
Netflix isn't the enemy per se, rather it's streaming video as a category that's the monster hovering over the company, threatening it with ultimate defeat. As everybody and their grandmother knows by now, with the proliferation of ever-wider delivery pipes and media (cable, satellite, Internet), DVD as a medium is probably doomed.
Streaming is the present and future of home entertainment, so a company like Coinstar that's so heavily invested in DVDs needs to post spectacular results in order to move its stock. It's no longer enough for it to have a better-than-average quarter that adds a few cents to full-year EPS guidance.
There's always coffee
To its credit, Coinstar is making concentrated attempts to diversify away from hard-copy entertainment renting. Proficient at anything that involves machine, money, and merchandise, it's teaming with Starbucks
And the company isn't entirely blind to the potential of streaming. It's working with mobile and TV provider Verizon
Winning the victory but...
Coinstar appears to be a well-managed company moving in sensible directions that have a good chance of paying off in the future. But it's hobbled by its deep involvement and investment in a fading technology.
Besides, outside of the Sony deal, it still struggles with supply. The more successful and profitable movie/TV content providers like Disney
This has been the subject of several lawsuits between the principals, and the issue's never been conclusively resolved. Redbox gets around the restriction by purchasing those companies' DVDs on the open market, however this is probably not the cheapest way to go, and it certainly isn't the best in terms of operational efficiency.
Considering the hurdles it faces in its business, it's admirable that Coinstar is racking up wins like the Sony deal and going into business with firms like Starbucks. It just needs to move further away from those shiny silver discs in order to start impressing the market again.
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Fool contributor Eric Volkman owns no stocks mentioned in the story above. The Motley Fool owns shares of Netflix, Walt Disney, and Starbucks. The Motley Fool has sold shares of Sony short. Motley Fool newsletter services have recommended buying shares of Coinstar, Starbucks, Walt Disney, and Netflix. Motley Fool newsletter services have recommended writing covered calls on Starbucks. The Motley Fool has a disclosure policy.