Coinstar, Inc - Momentum

CSTR 041412

Coinstar, Inc (CSTR)

In a world with where you can do just about everything wirelessly, it’s hard to believe that coin counting machines and DVD rental kiosks are still flourishing. Despite streaming movie heavies like Apple’s iCloud & AppleTV, Netflix and Hulu, it seems that there is still a profitable market for those with a opting to get in their car and actually rent a physical DVD.

There may be more than just nostalgia in the DVD market; last Thursday Coinstar increased its earnings and revenue forecasts for its first quarter and full year, noting increased consumer demand at its Redbox movie rental kiosks. The company cited high demand for popular movies like “Moneyball” and “Puss in Boots” and others.

Coinstar operates more than 35,500 Redbox DVD rental kiosks and 20,250 Coinstar coin-counting brands all across the country. Part of their strategy and success is their strategic placement of their kiosks (DVD and coins) as well as their partnerships with other major companies like StarBucks, Lowes, CVS, Maggianos and more. These partnerships not only allow Coinstar users to get the entire value of their change towards a gift card, but the subsidies and mutual relationships with other vendors add to Coinstar’s revenue and visibility.

Unlike Netflix, they were able to successfully raise the prices of their DVD and Blue Ray rentals. There is a part of me that believes that Coinstar’s ultimate fate would be the same as Block buster; but for now the company is thriving and firing on all cylinders. Wall Street is getting behind its momentum pushing the stock to new heights.

A Blowout Quarter
Coinstar is due to report full Q1 earnings on April 26th, but pre-released numbers last Thursday, sending shares 12% higher. Ahead of Thursday’s press release, the Zacks consensus estimates was for 87 cents per share and revenue of $537.66 million in Q1. Coinstar’s new range puts preliminary revenues in the range of $567 million to $569.2 million and diluted earnings per share in the range of $1.62 to $1.66 per share; a huge leap above expectations.

While the pre-announcement takes some of the volatility factor out of the actual earnings report, it doesn’t mean that shares can’t continue their upward march. Investors will get the details of the surge in earnings and hopefully reassurance that it will continue.

Financial Profile
CSTR is a smaller mid-cap (2.04 billion) company that is trading at about 14.85 times forward (expectations for next quarter) earnings. That valuation is on the cheap side for a company with a growth history like Coinstar. Their current PEG ratio is on the low side at .86, which helps to prove the “value” argument.

CSTR just became a Zacks Rank 1 strong buy (again) on April 13th.

The company reported a quarterly sales increase of 12% at their last earnings report, Annual sales were up 33% compared to Q4 2010 with total sales of roughly 1.84 billion in FY2011. CSTR earnings jumped almost 108% from $1.57 in FY2010 to $3.26 in FY2011. CSTR is expected to earn $4.43 in FY2012 according to the Zacks Consensus Estimate.

Moving Forward
Wall Street will get more specifics when we see the full report on April 26th. For now, expectations are for CSTR to generate $1.38 in income this quarter. Of the 13 analysts who cover CSTR, the consensus is for the company to grow earnings by 22.70% in the current year (FY2012) and roughly 2.4% in FY2013 (look for revisions in these numbers after the earnings report).

In terms of the magnitude of analyst estimate trends, we are seeing all of the consensus estimates higher than they were 90 days ago for the current and next quarters as well as FY2012 and FY2013. Even before the pre-announcement, analysts had made upward revisions to estimates.

For the 2012 full year, Coinstar management now expects:

Consolidated revenue between $2.155 billion and $2.280 billion;
Core adjusted EBITDA from continuing operations between $465.0 million and $495.0 million
Core diluted EPS from continuing operations between $4.40 and $4.80 on a fully diluted basis.

Coinstar is making all time highs as the stock trades up towards $70. While momentum is on its side, it might be prudent to let the stock settle down a bit and find support. If it holds the $65 dollar level, than we could see another leg up.