Jingle, jingle, what's that sound? With Christmas come and gone, there's only one thing it can be: coin-changer extraordinaire Coinstar (NASDAQ:CSTR) approaching, with a pocket full o' quarters and an earnings release for Q4 and FY 2005 in hand. Investors can count the former and peruse the latter after market close tomorrow.

Wall Street Wisdom:

  • General consensus. Only six analysts track the fortunes of this Motley Fool Hidden Gems pick. Four of them rate the company a hold; the other two vote buy.
  • Revenues. Analysts believe that Coinstar's revenues grew year over year in Q4 2005, up 14% to $125.19 million.
  • Earnings. Analysts expect Coinstar to report a $0.03 decline in quarterly profits from last year's $0.26.

Margin watch:
The trend in Coinstar's margins isn't pretty. Eighteen months ago, the firm kept more than half its revenues as gross profits; today, it keeps less than one-third. Operating margins have fallen by 40%, and the net has been cut by more than half.

Margins %

6/04

9/04

12/04

3/05

6/05

9/05

Gross

54.2

44.9

39.1

35.2

32.6

32.7

Op.

17.6

14

12.7

11.3

10.6

10.6

Net

11

8.3

6.6

5.5

4.9

4.8
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.

Foolish forensics:
What's behind the slide? In a word: growth. Coinstar acquired American Coin Merchandising (ACMI) during its September 2004 quarter, more than doubling its revenues in one fell swoop -- but more than tripling its cost of goods sold at the same time. Ever since it brought ACMI into the fold, Coinstar's profitability has been on the decline.

Foolish lookout:
Which sets this Fool to thinking: In December, Coinstar expanded further by buying coin-op DVD-vendor Redbox from McDonald's (NYSE:MCD). Will that prove to be more diworsification? We'll see the first hints in tomorrow's release. Investors should also watch for any comments the company might make about its test program to place Coinstar coin-counting machines in Wal-Marts (NYSE:WMT), which began in October. As an expansion of the company's original, high-margin core business plan, that move seems to have the greatest potential for success.

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Fool contributor Rich Smith does not own shares of any company named above.