By now, the story sounds familiar. Coinstar
Our adoration for the company here at the Fool is in the plain sight for the world to see. It's been a year -- and an 80% appreciation in price -- since Bill Mann first sang the company's praises in Motley Fool Hidden Gems. Since then, Alyce Lomax and Chris Mallon have both joined the chorus with their own positive takes. (To be fair, there have been a few doubters along the way too).
Of course, to appreciate the cleverness of a business idea and to fully participate in the venture by buying the company's stock are two different things. Though I love the premise behind a company that turns pesky change into crisp dollar bills or transfers the coins to a card you can use in the supermarket or a nearby Starbucks
Coinstar recently announced its machines are located in all 50 states. It's not that this means there is no room for growth, but it does suggest that we can't rely on the explosive growth that comes with a regional stalwart that becomes a nationally recognized brand name. This isn't exactly the next Home Depot
Now, I'm being a little unfair -- that's a high bar to set. But while it's true that not every company has to be a Rule Breaker for you to beat the market, my problem with Coinstar rests solely with its valuation. A forward P/E of about 21 for a company that is expected to grow at a rate of 17.5% per year for the next half-decade is pricey for my tastes, especially once you consider that the balance sheet carries a sizable debt load and that the nature of future expansion is fairly uncertain. Mainly, the company has to expand by reaching lucrative deals with large national superstores (who are likely to drive a hard bargain), acquiring other companies and moving away from its coin-counting niche into areas with heavy competition, such as prepaid minutes for cellular phones.
With such risks, I'd recommend looking for a wider margin of safety on Coinstar, such as a forward P/E in the high teens.
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Fool contributor Marko Djuranovic does not own shares in any companies mentioned in this article. He lives in New York City and buys his groceries over the Internet (no joke!) so he has yet to experience the green coin-counting machines in person.