Coinstar, Inc. (CSTR): Zacks Rank Buy

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Coinstar, Inc. (NasdaqGS:CSTR - News) took advantage of the stumble in the DVD rental wars by its rival Netflix in 2011 to build momentum for it redbox brand. This Zacks #1 Rank (strong buy) is a value stock that is also expected to grow earnings by double digits in 2012.

Coinstar operates 34,400 redbox DVD rental kiosks and 19,500 coinstar coin-counting brands in supermarkets, convenience stores and other ease-of-use locations.

For instance, the company just inked a deal to put redbox kiosks in some of Chicago's subway stations.

Coinstar Beat Again in the Third Quarter

On Oct 27, Coinstar reported its third quarter results and surprised on the Zacks Consensus Estimate by 33%. Earnings per share were $1.18 compared to the consensus of just 89 cents. The company has an impressive track record of earnings surprises as this was the 11th consecutive beat.

Revenue jumped 22.5% to $465.6 million boosted by redbox which saw revenue growth of 27.7% to $389.8 million. Coin revenue was also up, but only 1.1%, to $75.5 million.

Year to date, the redbox business surpassed $1 billion for the first time and also became the leading renter of DVDs.

Raising the Price on DVD Rentals

An issue that caused some angst among investors, was the announcement that effective Oct 31, the company would increase the DVD rental rate by 20% to $1.20 from $1.00. The prices for Blu-ray and video game rentals would not change.

It was the first price increase on DVD rentals in 8 years. But some thought that customers might balk at the price increase.

We'll find out on Feb 9, when Coinstar is scheduled to report its fourth quarter results.

Analysts Still Bullish on the Future

Over the past 3 months, the 2011 and 2012 Zacks Consensus Estimates have inched higher.

The 2011 Zacks Consensus Estimate rose to $3.26 from $3.10 in that period. That is earnings growth of 60% as the company made just $2.03 in 2010.

Double digit growth is expected to continue in 2012. The 2012 Zacks Consensus Estimate climbed to $3.87 from $3.73 in the last 90 days.

That is further earnings growth of 19%.

Shares Have Gone Nowhere in 2011

Coinstar has traded in a trading range for most of 2011.

After the third quarter results, with the announcement of the price increase, the stock sold off but has since regained most of that. But it still hasn't been able to break out.

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Coinstar now has attractive valuations.

In addition to a P/E under 15, which is the cut-off I use for value stocks, Coinstar also has a price-to-sales ratio of 0.8. A P/S ratio under 1.0 usually means a company is undervalued.

Additionally, its price-to-book ratio of 2.9 is within the value parameters as I use 3.0 as my upper range for value.

Coinstar has been lumped in with Netflix and its problems in 2011. Yet this company is expected to continue to grow earnings by the double digits and it has a strong, and expanding, brand in redbox.

Investors looking for a value in the DVD rental space might want to take a second look at Coinstar.

Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor of the Turnaround Trader and Insider Trader services. You can follow her on twitter at traceyryniec.

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