Coinstar soars on great earnings, Verizon deal
Will Coinstar be able to ride on the success of its new joint venture?
Shares of Coinstar (CSTR) surged more than 19% Tuesday following a very strong fourth-quarter earnings report that was released after the closing bell Monday. In addition, the parent company of Redbox, the ubiquitous DVD rental kiosks, announced a joint venture with Verizon (VZ) that will give it a footprint in the fast-growing streaming video content market. Coinstar also revealed that it was acquiring NCR Corp.'s (NCR) DVD rental kiosks, which are operated under the Blockbuster Express brand, for $100 million.
Shares slipped slightly Wednesday, opening at $57.69 and settling in around $57.23 by midday.
The company's performance was largely driven by growth in its Redbox DVD kiosk franchise. The company reported fourth-quarter earnings of $31.5 million, or $1.00 per share, versus $11.7 million, or $0.35 per share, in the year-ago period. This easily beat Wall Street consensus estimates of $0.64.
Revenue at Coinstar for the quarter was $520.5 million, an increase of 33.2% over the $390.8 million the company reported in last year's fourth quarter. Redbox revenue was up 39.5% to $445.6 million, while coin revenue added 4.8% to $74.4 million.
In addition to announcing great earnings, the Verizon joint venture and the $100 million NCR asset purchase, the company also provided strong forward looking guidance.
Looking ahead, Coinstar sees first-quarter earnings per share(EPS) between $0.76 and $0.91, and revenue in a range of $530 million to $555 million. Currently Wall Street analysts expect CSTR to report EPS of $0.86 on revenue of $514.5 million in the first quarter.
For fiscal 2012, CSTR sees EPS between $3.80 and $4.30 on revenue of $2.075 billion to $2.250 billion. This compares to current analysts' consensus estimates of $3.86 per share on revenue of $2.170 billion.
While the company's Q4 earnings are having the most significant effect on shares in the near-term, the Verizon joint venture could be a long-term game changer for the company. While Redbox is still experiencing very strong revenue growth, the future of content delivery lies in streaming.
The announcement of this joint venture shows that Coinstar is looking to gain a footprint in the streaming business in order to position itself for the long-term. Investors should take note. The deal will offer consumers video streaming in combination with rentals from Redbox's 35,000 DVD kiosks.
Verizon will hold a 65% stake in the JV with Redbox retaining 35% ownership. The joint venture will offer the convenience and value of Redbox rentals combined with a new content-rich video on-demand streaming and download service from Verizon.
Initially, Coinstar is expected to invest $14 million into the venture, and both companies may end up contributing as much as $450 million.
Another exciting development for Coinstar is its announced purchase of NCR's DVD rental business, which operates 10,000 vending machines under the Blockbuster Express name. The deal should help bolser Coinstar's DVD kiosk business, although it is unclear whether the acquired machines will be re-branded as Redboxes.
In May, NCR sued a trust which was set up for Blockbuster Inc. to retain rights to the Blockbuster Express name. Subsequently, that trust was sold to Dish Network Corp. (DISH).
In light of all the new information that was released in the last two days relating to Coinstar's business, it is not surprising that investors are wasting little time placing bets on what it means for the future of the company -- and the initial reaction has been extremely bullish.
On Tuesday the stock was up around 19% on massive volume, as significant amounts of new money have been pouring into the name. At around mid-day, more than 13 million CSTR shares had traded hands compared to a 3-month daily average of around 1.1 million.
Over the last year, CSTR shares have been volatile, but overall, the stock has been an excellent performer, rising more than 48%. On the six-month chart, CSTR is up 40% and over the last three months, shares have risen a little more than 25%. In the wake of Tuesday's surge, CSTR has now gained 31% in 2012.
Given the company's strong growth pedigree and history of creating value for shareholders, the stock's valuation still looks compelling at current levels. Shares trade at a trailing price-to-earnings ratio of 23, a forward price-to-earnings ratio of 15.09 and a price/earnings-to-growth ratio of 0.70. The median Wall Street price target on the stock is $65.00 with a high target of $80.00.
In the wake of the bullish developments announced this week, and what appears to be a very reasonable valuation, Coinstar is a name that growth investors will want to keep on their radar going forward.
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