Five Reasons to Sell Coinstar, Inc. (CSTR)

3. Dependency on retailer locations

Coinstar depends upon a number of retailer locations for the placement of their kiosks. Some of the major retail chains including the likes of Wal-Mart, Walgreens, and Kroger all generate substantial amounts of revenue for Coinstar, Inc. (NASDAQ:CSTR) through kiosk placements. These retail chains all operate large stores, but can still terminate current arrangements for better utilization of their retail footage in stores. This can materialize if Redbox and Coin kiosks fail to generate substantial amounts of revenue.

With a material amount of competition in both the DVD business as well as the Coin counting business, the termination of these retail relationships can have a strong negative impact on the company’s operating results.

4. Losses from newer business segments

The company’s management is very keen to enter into new business segments, and experiments with newer concepts and testing prototypes. This is actually a good thing, and deserves praise as well. However, entering highly competitive new retail concepts has been leading to losses for the company’s New Ventures segment.

It is now expanding into testing concepts like Rubi Coffee kiosks, ticket sales on Redbox kiosks, as well as the big bet on Redbox Instant by Verizon. While some of these concepts can be home-runs for the company in the future, the losses from the segment have increased in each of the last 3 years.

5. Coin business faces incremental competition

The company’s coin conversion business faces a lot of competition. It grew segment revenue last year, but primarily due to the increased number of new kiosks in place. However, the key measure for retail stores, the same-store sales stayed flat on a year-over-year basis. The company’s calculation of same-store sales is a little different from other retail companies, as it counts 13 months, as opposed to the industry standard of 12 months.

And this segment is facing a lot of incremental competition as many banks and even some big retailers often offer their own coin-counting service by acquiring the necessary equipment. A reason for this increased competition might be the almost 10% transaction fee the company charges for the coin service. As a result, the competitive scenario for this business line might worsen.

While there are some small negatives in Coinstar’s business, the company is growing its overall revenue as well as its bottom line. And also it has a number of newer initiatives, some of which might gain solid traction in acquiring new customers, especially the Redbox Instant venture. However, the company also has a share repurchase program as well, and a pretty solid balance sheet. As a result, there might be some upside for the stock as well.

The article 5 Reasons to Sell Coinstar originally appeared on Fool.com is written by Ishfaque Faruk.

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