, CFA submits:
I don't follow Coinstar (
) very closely, but I have paid attention to the company for
several years now. For those not familiar with it, it's the
operator of those ubiquitous coin-counting machines, but, more
importantly, it is the operator of those ubiquitous Redbox DVD
Most recently, I was very impressed by their hiring of Scott Di
Valerio as their CFO last year, adding significant legitimacy to a
company whose business model has been changing over the years and
is questioned over the longer term. Di Valerio, a Microsoft (
) veteran, was a very senior member of their Finance Department who
was thought to be a potential successor to John Connors when he
left in 2005. It wasn't because of this that the stock did so well
last year - that was a function of better expected earnings
As you can see, the estimates rose from about 1.60 for 2010 to
about 2.20 over the past three quarters, rising substantially after
each earnings report. The numbers for 2011 were similar, with the
estimate rising from 2.26 three quarters ago to 3.34 at year end
The stock was shredded on Friday after a nasty pre-announcement,
leaving the stock 37% below its all-time high set in late November.
It's still sharply higher than when Di Valerio's appointment was
announced in March:
Before I address the fundamental issues, let's talk about the
chart. First, this was a big breakout earlier this year (right
after Di Valerio joined). The 38 level had been resistance for
quite some time - that was the prior all-time high in May 2008, and
you can see the several attempts in 2009 to move higher. Second,
after Friday's plunge, there is an "island" of trading left above.
Interestingly, there was an island previously after the April
breakout that was ultimately essentially filled at the lows in
September (38.75). A final technical observation is that this guy
is still in a longer-term uptrend for now and has beaten the market
by 39% over the past year despite the recent carnage. From the lows
of 2008 (15.71 in December) to the peak two years later, the stock
has now corrected approximately 50%.
So, is this one worth taking a shot? I think it merits serious
consideration, and I hope to spend the next few weeks giving it
more thought. The preannouncement that they shared late Thursday
was all about short-term issues from what I could tell, and
investors should be aware that the real challenge on this stock is
its long-term strategy. Many are betting (23% of the float is
short) that it lacks a strategy to be viable in the future, as
digital delivery of movies will make the company about as appealing
as a dial-up internet provider. I tend to think that this view is
overstated -- they used to say the same thing about Netflix (
). Like the dollar stores, which maybe should have been wiped out
by Wal-Mart (
), dollar DVD rentals will likely enjoy a long tail.
Looking specifically at the recent news, here are the key
- Q4 Sales will be $391mm rather than in a range of $415-440mm
(still 31% growth and redbox growth of 38%)
- GAAP EPS will fall between .65 and .69 rather than in a range
of .79-.85 (though .04 of the reduction is due to a higher share
count and to share based expense due to the run-up in price at
year-end). This is flat sequentially but up huge from a year
- Performance was weak from new title releases and slower
uptake of Blu-ray titles - note that this was the first quarter
with the new 28-day delay for new titles.
- The company also admitted to having removed older inventory
- Finally, customers returned rentals to different kiosks from
which they rented to a greater extent than expected.
- For 2011, the company now expects sales of $1.7 to $1.85
billion and GAAP EPS of $2.60-3.10 - previous consensus was EPS
of about $3.34.
What can we make of all of this? My first observation is that
the growth is stunning, yet below expectations. Second, it seems
like all of this is due to short-term factors. The economy is much
stronger than a year ago, and I maintain that people weren't as shy
about going out and spending money during the holiday season.
Additionally, from what I have heard, the titles weren't very good.
My family tends to be a consistent small user of Redbox, and we
didn't rent any movies in December. We did go away for a few days,
but the real issue was that nothing was that appealing. Is all of
this worth a 33% drop in the value of the company?
The long-term story is not as clear to me. The bears would argue
that there are too many kiosks out there and that the demand for
physical DVD rentals will be in decline. I would suggest that the
company has probably benefited from some high profile video chain
store closings as well, exaggerating growth. That guidance was a
bit too wide for my liking (a 15-20% spread in the EPS outlook),
but the stock has moved to a defensible valuation level now. At the
low-end, the stock trades at 16PE. The median over the past 5 years
has been 32X. The balance sheet is fairly strong, with net debt to
capital at Q3 roughly 27%. Total Net Debt is less than 1X trailing
Bottom-line: Gun to my head, I would buy. Since there isn't a
gun to my head, I plan to investigate further over the next month.
The company will be reporting on 2/3.
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours.
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