Coinstar: Information Age Needs Vending Machines

YCharts

Coinstar’s (CSTR) roots lie in some rather 20th century ideas: vending machines and counting up all those pesky coins that accumulate over the course of a month and enabling customers to turn them into dollar bills (for a fee) or gift certificates. Is it too much of a throwback to an old way of doing business, with its Redbox kiosks becoming as much a feature of the landscape as, say, the golden arches of McDonald’s (MCD) fast food restaurants? Or does its push into new kinds of products and services, including a partnership with Starbucks (SBUX), signal that this is an undervalued company poised to take off? If so, a stock chart suggests the market didn't get the memo.

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CSTR Chart

On the surface, the fundamentals don’t look terribly encouraging. In late April, Coinstar reported that one of its core businesses, the Redbox DVD rental kiosks, continues to see growth rates decline (to only 1% in the just-reported quarter). Thanks to that trend, and the fact that costs jumped 7.5%, the company announced a 58% decline in earnings. While those profits were still higher than analysts had anticipated, revenues fell below forecasts.

But as with any company, it’s not just about what it looks like today, but what lies ahead. And in Coinstar’s case, that is an intriguing hybrid of bricks and mortar retailing – physical kiosks – and new kinds of products for which a definite demand exists in today’s increasingly cashless society, such as prepaid credit/debit cards and prepaid cards giving buyers credit that can be applied to their cellphone and other wireless service. Above all, Coinstar has undertaken a new partnership with Verizon (VZ), that will lead to a new business, Redbox Instant, offering streaming movies to Verizon customers. True, that puts them into direct conflict with Netflix (NFLX), the incumbent and one of the pioneers in this business, but as the Apple (AAPL)/Samsung rivalry has shown, there is room for more than one player in these emerging businesses. Moreover, Coinstar offers a less pricey way of playing the growing consumer interest in streaming.

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CSTR Forward PE Ratio Chart

To become an outright bear on Coinstar, you would need to be convinced that the company’s management isn’t ingenious enough to devise new ways to make a profit from its core kiosk business model – and the evidence seems to run counter to that. On the contrary, Coinstar – in the process of rebranding itself by renaming the company ‘Outerwall’ – has been able to forge partnerships with well-established companies and those with a long history of marketing prowess, such as Starbucks. Certainly, very little growth currently is priced into Coinstar’s share price, based on PE ratio and other measures.

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CSTR PEG Ratio Chart

To become a bull simply requires a degree of confidence that the company can rein in its costs, or that its new ventures will gain momentum – or that the company will emerge as a takeover candidate for a company like Amazon (AMZN) that already is a player in streaming video and that has begun to explore bricks-and-mortar kiosks of a sort that enable its customers to pick up high-value purchases rather than have UPS or FedEx drop them on their front doorsteps, vulnerable to theft. Awaiting evidence that these positive factors will emerge, at the very least Coinstar offers investors interested in the streaming video trend a cheaper alternative to the more costly Netflix – and some diversity in the source of revenues as a bonus.

Suzanne McGee, a contributing editor at YCharts, spent nearly 14 years as a reporter at the Wall Street Journal, in Toronto, New York and London. She is also a columnist for The Fiscal Times, and author of "Chasing Goldman Sachs", named one of the best non-fiction books of 2010 by the Washington Post. She can be reached at editor@ycharts.com.


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