Coinstar (CSTR) Shares Surge on Increased First Quarter Guidance

Shares of Coinstar (CSTR: Charts, News), the parent company of movie-rental kiosk operator Redbox, rallied strongly at the end of last week, topping off its 44% increase over the past year. Coinstar revised its first quarter estimates on both earnings and revenue upwards, piquing the interest of both investors and momentum traders.

The Bellevue, Washington-based company increased its first quarter earnings estimates to $1.62 to $1.66 per share on revenue of $567 million - a massive increase from the 76 to 91 cents per share on revenue of $530 million to $555 million it had forecast just two months ago. Final results are scheduled to be released on April 26, but the new earnings forecast tops all analyst expectations by a wide margin. On average, analysts had expected Coinstar to earn 89 cents per share on revenue of $538.6 million.

Daily Chart

Coinstar's shares have traded in a volatile, wide range between $37.43 and $69.74 over the past year. A year ago, analysts were decidedly bearish on Coinstar's growth prospects, pointing out that its optical disc rental vending machines would become obsolete with the widespread adoption of streaming media, the primary platform of its main competitors Netflix (NFLX: Charts, News), Amazon (AMZN: Charts, News) and Apple (AAPL: Charts, News). In addition, Coinstar was butting horns with Comcast's (CMCSA: Charts, News) Universal Pictures and News Corp's (NWSA: Charts, News) Fox over a decision to delay new DVD rentals by 28 days after its first retail discs were offered for sale. Coinstar struggled with the new schedule, which disrupted the company's profit and sales in the first quarter of 2011, due to "misjudged" demand. Analysts were quick to label Coinstar the "next Blockbuster", apparently doomed to ride a dying technology to bankruptcy.

Now, a year later, Coinstar is back on track, despite submitting to the demands of Universal and Fox. The company's first quarter was significantly boosted by lower credit card processing fees and the popularity of "Puss in Boots", "Moneyball" and "50/50" at its 35,500 Redbox rental kiosks. Coinstar also raised rental prices during the quarter, with no noticeable impact on sales volume.

In addition to its self-service DVD rental kiosks, which are a common sight in the United States, the company also operates coin-counting self service kiosks, which convert change into cash and stored value products. Coinstar's 20,250 coin-counting kiosks are placed through strategic partnerships with Starbucks (SBUX: Charts, News), Lowes (LOW: Charts, News), CVS (CVS: Charts, News), Maggianos and other companies, which benefit from customers exchanging their change for stored value cards at their retail locations. Coinstar machines charge a fee for cash returned, but not for stored value cards. In exchange, Coinstar gets increased visibility and brand recognition. For the full year, the company expects to earn between $4.40 and $4.80 per share on revenue of $2.16 billion to $2.28 billion, topping estimates.

Analysts have rushed to change their ratings on Coinstar, which had been considered a stagnant stock. Northland Securities analysts increased their price target from $75 to $90, reiterating their "outperform" rating on the stock. Analysts at Zacks upgraded Coinstar from "neutral" to "outperform". Ronald Bookbinder, an analyst at Benchmark, commented, "We continue to see upside potential from the price increase and lower credit card fees than planned." However, analysts at JPMorgan (JPM: Charts, News) remained largely unimpressed, downgrading Coinstar from "overweight" to "neutral" and lowering its price target to $62.

Shares are fundamentally undervalued, trading at 13.3 times forward earnings with a 5-year PEG ratio of 0.79. Long-term challenges from Netflix, Amazon and Apple remain, especially if so-called "smart TVs" make optical drives obsolete. For now, Coinstar is cashing in on an untapped market, and shares are likely to continue to rally in the near term.

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Published on Apr 17, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

Copyrighted 2020. Content published with author's permission.

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