The entertainment industry continues to churn. Cable companies
have been losing clients at a steady clip,
Netflix (Nasdaq:
NFLX
)
has seen its subscriber base grow erratically, and attendance at
movie theaters has been weak for several years, as this
article notes
.
Investors trying to identify winners and losers in this space
have grown quite confused. After all, who knows how we'll be
getting our entertainment five years from now?
Perhaps it's better to avoid looking too far out and simply
focus on companies that are executing on their plan and look poised
to build a solid base of sales and profits for the quarters
ahead.
Looking at the forecasts for
Coinstar (Nasdaq:
CSTR
)
, operator of the Redbox DVD kiosk service, the picture should be
quite bright. The company, which recently exceeded
second-quarterprofit forecasts by roughly 7% compare with the same
period a year earlier, appears poised for double-digit sales growth
in 2012 and again in 2013 -- and even faster profit growth.
Meanwhile,shares have slid roughly $20 from the52-week high ,
and now look poised for a solid rebound.
I discussed Coinstar's burgeoning opportunity
about a year ago
. Since then, shares surged steadily higher and it would have been
wise to book profits this past spring. But if you missed the upward
move the first time around, then you've just been handed a second
chance.
In the intervening year or so, much has happened that can be
summarized as a series of positives and negatives.
First, the positives:
- Coinstar was able to take advantage of the deep distress in
the Blockbuster kiosk business, acquiring thousands of those
boxes and slowly converting them over to the Redbox brand. There
are now more than 35,000 DVD vending machines in service, up from
around 29,000 at the end of 2011.
- Coinstar signed a major contract with
Verizon (NYSE:
VZ
)
to roll out a streaming video service, which saved the company
millions of dollars in start-up costs.
- The company has made further progress in its testing of new
kiosk concepts, such as hot coffee vending machines (known as
Rubi), refurbished electronics and photo-producing kiosks.
- The company has made some recent strong management hires,
including Marketing Executive Anne Saunders and David Asch, who
will serve as director of content after holding a similar
position at
Frontier Communications (NYSE:
FTR
)
.
The negatives include:
The announcement that company President and Founder of Redbox
Gregg Kaplan will depart by next spring.
- Hollywood has released fewer hot new titles in recent
quarters, leading to the appearance of slowing growth in the DVD
kiosk business.
- More consumers are keeping movies out for just one night,
eating into the solid profits that come from delayed movie
returns (as consumers pay for each night that a movie is
out).
- Nevertheless, it's important to look past quarterly dynamics
and focus on annual results. After boosting sakes at least 25% in
each of the past four years, Coinstar's sales are slated to rise
another 23% this year (to around $2.27 billion) while rising
another 12% to 15% in 2013.
Equally important, this is a solidly profitable business.
Per-share profits have risen by a solid clip each year since 2008
-- despite the weakeconomy -- and should exceed $5 by 2013. Take a
look below at Coinstar'searnings per share projections next
year.
Coinstar's GrowingEPS
*Consensus estimates
Risks to Consider:
The current quarter's results may have been impeded by the
Olympics, so it may be prudent to expect Coinstar to earn less than
$1 a share this quarter, which reflects the low end of the range of
consensus forecasts.
Action to Take -->
Shares now trade for less than 10 times projected 2013 profits. On
anEBITDA basis, they are stunningly cheap, trading for around 3.5
times projected 2013 EBITDA of around $550 million. Such a
lowmultiple is likely because of concerns that the company's
operating metrics will soon turn south. But it's crucial to
remember that Coinstar's detractors have been anticipating a major
setback for this company for quite some time.
A half decade ago, many assumed the coin-counting business would
peter out (though it never did). More recently, skeptics wondered
how Redbox could compete with the convenience offered by
DVD-by-mail firm Netflix (and that fear proved ill-founded). Now
there is question whether Coinstar's new forays into coffee,
electronics and photos will make a splash. In effect, this company
has a history of proving its detractors wrong, and the current move
back to $50 sets the stage for another chance to prove the skeptics
wrong.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.