Coinstar Sees Big Growth in Movie Rentals

by Investing Daily
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If you have a change jar somewhere in your home, chances are you’ve heard of Coinstar (NasdaqGS: CSTR).

The company has a network of 20,200 coin-counting machines located in supermarkets, drugstores, restaurants and other retailers across the U.S. It also operates in Canada, Puerto Rico, the U.K. and Ireland.

These devices process customers’ coins and dispense a coupon they can take to the checkout to either redeem for cash or put toward groceries. In return, the Coinstar machine takes a 9.8% cut.

Coinstar Machines Attract a Lot of Customer Traffic

Coinstar isn’t a high-profile business, but it commands strong loyalty from its customers. The company says its Coinstar machines process 600 coins a minute. Since the company started up in 1991, it has processed roughly $24.5 billion in coins.

The largest single transaction took place in Flomaton, Alabama, in 2005, when Edmond Knowles dumped 1,308,459 pennies (or $13,084.59) into the Coinstar machine at the Escambia County Bank.

In addition to coin counting, the company owns another seemingly antiquated business, a self-serve DVD rental service called Redbox. In all, Coinstar has 36,800 Redbox kiosks across the U.S. Each one rents up to 200 titles and takes up just 12 square feet of floor space. Like the coin-counting machines, Redbox kiosks are located inside retail stores.

Coinstar Is an Old-Time Business That’s Set to Compete in an Online World

On the surface, Coinstar looks like a dying business. After all, aren’t consumers switching to credit and debit cards and online payments? And what about Netflix (NasdaqGS: NFLX)?

Certainly, the trend toward online and credit card payments is a threat to Coinstar’s coin-counting business. In addition, Canada recently discontinued its penny, which could have a further negative impact.

In response, Coinstar has been gradually shifting away from coins and toward its faster-growing movie rental business. The coin segment accounted for just 11.4% of Coinstar’s overall revenue in the first quarter of 2012, down from 14.4% a year ago. During the quarter, this business saw a 5.6% revenue increase.

Meanwhile, Redbox’s sales jumped 38.8%, thanks to rising same-store sales, new kiosks and strong rental revenue from new releases.

That was the main reason why the company’s overall revenue rose 36.0% from a year ago, to $586.2 million. Operating income rose sharply, to $78.4 million from $31.4 million. Profit margins were also up: 13.8% in the latest quarter versus 7.4% a year ago.

DVD Kiosks Give Coinstar an Edge Over Netflix

So far, Netflix isn’t putting up much of a fight. Coinstar stock is up roughly 48% in the first six months of the year, to around $66. Netflix, on the other hand, has plunged 10.6%, to $81.64. A year ago, it was trading near $300.

Investing Daily editor Jim Fink has been closely following Netflix for years. In his October 2011 article, “Is Netflix a Buy After the 35% Stock Plunge?” he outlines a number of challenges the stock faces. Mainly, he argues that the company’s business model is “broken,” as evidenced by its 2011 attempt to hike its prices and split itself into two companies:

“CEO [Reed] Hastings’ disastrous July decision to raise prices by 60% caused a consumer revolt that resulted in more than 800,000 people dropping their subscriptions. A September apology for the price increase did more harm than good, because it was combined with a disastrous announcement that the company was splitting off its DVD rental business into a separate website called Qwikster. Subscribers hated the idea of losing the convenience of a single website to access both DVD rentals and streaming, which led Hastings to backtrack three weeks later and cancel the entire Qwikster plan.”

In addition, the company faces much higher expansion costs than Coinstar, as Fink points out:

“Expanding video streaming into 43 Latin American countries, as well as the U.K. and Ireland, also seems like a really bad idea. CEO Hastings said that breakeven from this expansion may take longer than the two years it took in Canada because of stronger competition from cable and satellite video providers.”

Coinstar Is Taking a Patient Approach to Streaming Video

In February, Coinstar announced that it is teaming up with Verizon (NYSE: VZ) to offer a streaming video service to compete with Netflix. The partners are still working out the details, but Reuters reported that the price will start from about $6 a month for movie streaming and one DVD rental at a time from Redbox’s kiosks.

That’s in comparison to Netflix’s $7.99 monthly membership fee, which includes either one DVD by mail or streaming only.

The move is a prudent one for Coinstar, because it gives it a deep-pocketed partner with related expertise (Verizon offers streaming video to members of its FiOS TV service) to help build the required online web infrastructure.

At the same time, the company continues to grow Redbox. On June 25, Coinstar closed its $100-million purchase of NCR Corporation‘s (NYSE: NCR) DVD rental business. This deal includes DVD kiosks, inventory and certain retailer contracts. The company expects the acquisition to start adding to its earnings in 2013. For more growth stocks picks, check out Top Growth Stocks To Own.

Article originally posted here.

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