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Coinstar's stock sinks on Redbox growth worries

BELLEVUE, Wash. (AP) -- Coinstar Inc. shares backtracked Friday amid concerns that its growth is slowing as its Redbox kiosks for renting DVDs reach a saturation point.

THE SPARK: Most of the numbers released late Thursday in Coinstar's fourth-quarter earnings report and forecast for this year raised red flags among investors.

Although Coinstar's earnings for the final three months of the year topped analysts' estimates, that was overshadowed by a potentially troubling trend in the Redbox division that generates most of the company's revenue.

Fourth-quarter revenue at Redbox rose by about 10 percent from the previous year.

The growth didn't impress Wall Street because it lagged a 23 percent increase in the total number of Redbox kiosks set up in supermarkets, drug stores and other retailers. Redbox ended last year with 43,800 DVD-dispensing kiosks, up from 35,500 kiosks in the previous year. Coinstar expects to add another 500 to 1,000 Redbox kiosks in the U.S. this year.

Exacerbating the growth worries, Coinstar's projections for this year implied Redbox revenue would only increase nine to 17 percent this year. The company's first-quarter forecast also fell below analysts' predictions, partly because Redbox had only 12 new DVD releases available to rent in January compared with 23 at the same time last year. Coinstar hopes to make up for that shortfall this month and next month.

Despite its slowing growth, Redbox is still winning converts as more video-rental stores close and Netflix Inc.'s DVD-by-mail subscription service shrinks. Netflix ended last year with nearly 3 million fewer subscribers than at the start of 2012.

The entire DVD market is shrinking as more people get Internet-connected TVs and other devices tailored for watching video online. Internet video is now Netflix's main business, with 27 million U.S. subscribers.

Redbox is trying to challenge Netflix in the video-streaming market with an alternative service formed in a joint venture with Verizon Communications. The service began its testing near the end of last year. If all goes well Redbox will start selling the video-streaming service on a broader scale before the end of March.

In the meantime Coinstar is still paying the bills to build the streaming service. The company absorbed a $20 million charge for the streaming service in the fourth quarter and may take another hit of up to $16 million this year.

THE BIG PICTURE: Coinstar should still do well, as long as DVDs are around —especially, with Netflix gradually phasing out the discs to focus on expanding its Internet video service. Redbox's shelf life, though, may hinge on how much longer DVDs will remain a significant part of the home-video market, a subject of intense debate.

Coinstar, based in Bellevue, Wash., is trying to lessen its dependence on DVDs with its new video-streaming venture and by developing kiosks that sell tickets and coffee.

ANALYST'S TAKE: "In our view, Coinstar's core businesses are mature, and future growth will be very slow." Wedbush Securities analyst Michael Pachter wrote in a Friday research note. Pachter still recommends the stock around its current price.

Benchmark analyst Ronald Bookbinder's misgivings about Coinstar prompted him to lower his price target on the stock from $85 to $65.

SHARE ACTION: Coinstar fell $3.71, or 7.1 percent, to $48.39 in afternoon trading. The shares have ranged from $40.50 to $71.82 in the past 52 weeks.