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Coinstar, Inc. (CSTR): A Good Buy?

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Automated retailer Coinstar, Inc. (NASDAQ:CSTR) seems to be quite a favorite amongst the short-sellers. Roughly 45% of the company’s outstanding shares are sold short, by investors who remain overly skeptical about the company’s prospects.

However, the disc rental business seems to be doing well for Coinstar, Inc. (NASDAQ:CSTR) as it expands beyond DVDs to higher quality Blu-ray discs as well as video game rentals. The company’s strategy remains focused on introducing newer products into its core automated retail business

Redbox Doing Well; Video Game Rentals A Big Opportunity

When most people think of Redbox, they think movie rentals only. But the company seems to be introducing newer offerings, to diversify away some of the risks from the proliferation of Internet-based streaming. The Redbox segment grew its revenues at solid rate of 22% on a year-over-year basis.

The number of Kiosks increased substantially from a year ago and ended 2012 with 43,700. Growth in the number of kiosks was in part, attributable to the acquisition of a large number of kiosks from another technology-based company, NCR Corporation (NYSE:NCR).

However, aside from inorganic growth stemming from the NCR Corporation (NYSE:NCR) asset acquisition, Redbox’s same store sales growth stood at a respectable 10.2% for 2012. And the net Kiosk revenue per rental increased a solid almost 12%, and ended F’12 with $2.55 compared to $2.28 in F’11.

This healthy increase in revenue per rental was mainly driven by the increase in the daily rental fee, as well as increases in Blu-ray and video game rentals, both of which have higher daily rental fees. Video game and Blu-ray rentals now make up more than 10% of total rentals, and the company intends to strategically grow these opportunities.

The video game rentals business has a lot of growth opportunity as users will be more willing to rent-out a video game, before buying a pricey game. And substantially diversifies the company’s revenue base and dependence on movie-based rentals alone. Also, Blu-ray discs are more profitable for the company, as they command higher rental fees as well as provide better quality video for the consumer.

Coin Counting Business Facing Headwinds

Coinstar, Inc. (NASDAQ:CSTR)’s coin counting business increased its revenues by 3% mainly due to an increase in the number of kiosks which increased by roughly 100, and ended 2012 at 20300. However, the operating margin for the segment in 2012 stood at 21.7%, which is lower than the operating margin it generated in 2011, which was 24.5%.

And also, the same store sales declined by 0.1%. It is pretty evident the coin business is feeling the heat of increased competition. The number of transactions increased slightly year-over-year, but mainly due to the new kiosks installed in 2012. And the average transaction size stood at $39.30, which is slightly higher than the 2011 transaction size of $38.80.

This decline in same-store sales can be attributable to the increased competition from many large supermarkets as well as many banks that operate their own coin-counting services, and often times for free especially in the U.S. However, the coin business operates in a few international markets as well like UK, Ireland, Canada, Puerto Rico etc. But competition for this segment is likely to remain strong.

Absorbing the Competition

One of the better moves by the company was the acquisition of a number of assets from a competitor in the space; NCR Corp (NYSE:NCR). Redbox acquired roughly 6200 active kiosks from NCR’s entertainment business which included DVD kiosks, retailer contracts, as well as DVD inventory from NCR by paying roughly $100 million.

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