Many investors seem to be worried about Coinstar, Inc. (NASDAQ:CSTR)’s business prospects, as they think people are moving from DVD rental to online streaming. However, since the beginning of March, the company has experienced a rally of more than 11% to more than $56 per share. In addition, B. Riley reiterated its Buy rating on the stock with a price target of as much as $80 per share, a 42% premium to its current trading price. Should investors follow B. Riley into Coinstar now? Let’s find out.
Business snapshot
Coinstar, Inc. (NASDAQ:CSTR), incorporated in 1993, is considered a leader in automated retail solutions with two main business segments: Redbox and Coin. The Redbox segment includes 43,700 Redbox kiosks in 35,800 locations in different areas, such as grocery stores, drug stores, restaurants, and convenience stores in the U.S., Puerto Rico, and Canada. Customers could come in and rent, or purchase, movies and video games.
The Redbox segment generates revenue mainly from fees charged to rent or purchase a movie or video game. The Coin segment includes 20,300 coin-counting kiosks in 20,100 locations in the U.S., Puerto Rico, Canada, Ireland, and the U.K. Consumers could come in to the Coin kiosks to get vouchers or stored value products at their selections.
Redbox is the biggest profit source
The majority of Coinstar, Inc. (NASDAQ:CSTR)’s revenue, $1.9 billion, or 86.4% of total 2012 revenue, was generated from the Redbox segment, while the Coin segment contributed around $290.8 million. The Redbox segment also generated most of the company’s operating income of $238.7 million in 2012, whereas the operating income of the Coin segment was $65.2 million.
Interestingly, in the past three years, Coinstar has experienced consistent growth in Redbox’s same-store sales — 13%, 18.3%, and 10.2% in 2010, 2011, and 2012, respectively. The net kiosk revenue per rental has kept increasing, from $2.16 in 2010 to $2.55 in 2012. While Redbox’s operating segment has been growing, the Coin segment has experienced a decline. The same-store sales growth has been decreasing, from 6.7% in 2010 to (0.1)% in 2012.
New ventures look interesting
Coinstar, Inc. (NASDAQ:CSTR) has kept innovating itself. It has a New Ventures business to focus on identifying and developing new self-service concepts in the marketplace. In 2012, New Ventures generated only $2.5 million in revenue, but produced a loss of as much as $25.83 million. However, what makes me interested in this segment are its two new concepts. First is “Rubi”, offering Seattle’s Best coffee with partnership. Second is Alula, which buys back unused gift cards from consumers and resells them.
A value story with a cheap valuation
At around $58 per share, Coinstar is worth around $1.54 billion. The market values Coinstar quite cheaply, at nearly 3.7 times EV/EBITDA. Indeed, Coinstar has become a value story from a growth story.
, which provides customers DVD rental and streaming services, and Amazon.com, Inc. (NASDAQ:AMZN), a global leader in online retailing, are both growth stories. Netflix, Inc. (NASDAQ:NFLX) is trading at around $191 per share, with a total market cap of nearly $10.7 billion. Netflix has a whopping valuation of more than 100 times EV/EBITDA. Amazon is the largest company among the three, with around $118 billion in total market cap. At $260 per share, Amazon is also valued highly at nearly 44 times EV/EBITDA.
Interestingly, while both Netflix, Inc. (NASDAQ:NFLX) and Amazon’s operating margins are only 1.4% and 1.1%, Coinstar is the most profitable company with the highest operating margin of 12%.
My Foolish take
Coinstar, Inc. (NASDAQ:CSTR) is really a value story. In 2012, the company generated as much as $256 million in free cash flow. Thus the P/FCF is only 6. B. Riley has placed a target price of $80 per share on Coinstar. At $80 per share, Coinstar would be valued at around 5.4 times EV/EBITDA and only 8.7 times P/FCF. Personally, I think Coinstar could be worth even higher, based on its historical ability to generate consistent cash flow.
The article A True Value Story of a DVD Rental Business originally appeared on Fool.com and is written by Anh HOANG.
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