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Buffett-Munger Weekly Report: Coinstar, Inc. (CSTR)
Posted by: gurufocus (IP Logged)
Date: February 15, 2011 04:59PM
Coinstar, Inc. (Coinstar) is a provider of automated retail solutions. Its business segments include Coin services, DVD services, Money Transfer services and E-payment services. The Company’s core offerings in automated retail include its Coin and DVD businesses. Its Coin services consist of self-service coin counting kiosks, where consumers can convert their coin to cash, a gift card or an e-certificate, among other options. Its DVD services consist of self-service digital versatile disc (DVD) kiosks, where consumers can rent or purchase movies. As of December 31, 2008, its products and services were found at more than 95,000 points of presence, including supermarkets, drug stores, mass merchants, financial institutions and convenience stores. On May 25, 2010, the Company sold its e-payment services business to InComm. On September 8, 2009, the Company sold its subsidiaries comprising its Entertainment Business to National Entertainment Network, Inc.
Company Name: Coinstar, Inc.
Market Cap: $1.37 billion
Business Predictability: 4 STARS
Industry: Business Equipment
Coinstar has been an interesting story over the past decade. It has successfully transformed its business model from a niche industry by exploiting its kiosk retail footprint. The Company got its start as a novel niche play in converting consumer’s excess coins to cash. Coinstar built a formidable footprint of kiosks and distribution network across the United States – primarily in grocery store chains. Facing increased competition from existing regional banks and maturing growth, CSTR began to add on the DVD rental business to the existing locations. Although past results had been lumpy, CSTR hit an inflection point which accelerated both sales and profits with the DVD rental business. The already existing infrastructure created increased returns on incremental capital and widening free cash flow. The company’s growth may be reaching an inflection point as the industry is rapidly transforming. The key question – can CSTR adapt?
Ratios – P/E (ttm) 21.2X
Discounted Cash Flow Analysis –
10 year growth Margin of Safety
10% - 24%
Book Value / Share Return on Equity Return on Assets
Dec 2010 $13.93 14.9 5.1
Dec 2009 $13.27 9.7 3.3
Dec 2008 $11.33 9.8 2.9
Dec 2007 $11.00 7.5 3.0
Dec 2006 $11.55 5.8 2.6
Dec 2005 $10.59 7.6 3.5
Dec 2004 $ 8.96 9.0 3.7
Dec 2003 $ 5.38 17.1 9.6
Dec 2002 $ 4.82 55.6 27.0
Dec 2001 $ 1.74 4.7 0.0
The company issued lowered guidance on the mid-January conference call send the stock into decline. There was a great deal of confusion regarding the earnings miss having to do with a reversal of bonus accrual that occurred late in the quarter. The bulk of the operational portion shortfall occurred on Black Friday. The problem centered around inventory management with The Company ordering far too much inventory for mid-October based on the strong performance from September. Unfortunately the demand did not meet expectations and hence, the inventory overhang. Inventory issues aside, customer demand is the real focus. There was a noticeable change to the video-on-demand (VOD) window in 2010. Movie on demand release date changes compared to DVD release dates. Redbox, however, is still subject to the 28 day delay form certain major studios (comprising 40% of all rental activity). This was different for the prior year and had an impact on results. It was a unique double blow – Coinstar found itself with weaker demand due to the delay, yet had over-ordered inventory. Cannibalization is also beginning to have an impact with increased advertising costs eating into margins. The company continues to be plagued by long lead times and inventory issues that will most likely take one to two quarters to resolve. These means that Q1 and Q2 earnings may be depressed – probably with an inventory write off. The introduction of Blu-ray into the kiosk system has also created inventory problems – creating confusion for customers. BD Announces Live Webcast of First Fiscal Quarter Earnings Conference Call PR Newswire
FRANKLIN LAKES, N.J., Jan. 11, 2011
- Heavy competition in the movie rental business
- Heavy fixed capital investment
- Dependence on new retailers for growth
- Inconsistent returns on capital invested
There is little question that Coinstar has successfully migrated its unique kiosk system into the DVD rental system. With a built out infrastructure and distribution system, it has become highly profitable. However, with the recent missteps in execution and the considerable industry trends facing the company, there are just too many questions. Given its valuation at current prices (even after the sell-off), the shares don’t offer any real margin of safety.
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Stocks Discussed: CSTR,