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Coinstar Conundrum



February 12, 2013 – Comments (0) | RELATED TICKERS: OUTR , NFLX

Coinstar (CSTR) reported their earnings last Thursday and I've been wringing my hands with worry regarding the imminent demise of the DVD. You see, one can't insert a DVD into a mobile phone, tablet or other portable device and apparently nobody has any free time to spend that they don't spend staring at these little screens. A graph of the sale of these portable devices appears to have an inverse relationship to a graph of DVD rentals over the last couple years. According to management at Coinstar, DVD rentals have suffered primarily due to a lack of what they called "good product". In other words, the studios didn't produce anything worth driving to a Redbox location to pick up a movie. However, they projected that the rental volume would follow a "U-Recovery" over the course of the current year. I'm not really sure that the creation of "good product" is really something they can control, but, hey it sounds great to me and the recovery in rentals might follow a string of blockbuster movie titles. However, that chart of mobile device sales keeps haunting my vision.

Of course, DVDs aren't the only toys in Coinstar's closet. They've got coin counting machines... Hmm, well let's forget that one. That business produces revenue, but there is no growth there. A chart of the sales for that business looks like the brain activity of a coma patient. They've also decided to roll out some automated coffee kiosks that they can set next to their DVD rental machines. Who knows, perhaps, they'll sell tons of coffee to the people that spend hours browsing through the massive collection of new blockbuster titles. So far, the results from the coffee kiosk trials appear to be encouraging. Lastly, they have a joint-venture with Verizon to provide streaming video content over the internet. However, I'm a little worried that it might take quite a while to work the bugs out of this system. We experienced frustration with Netflix for a very long time as they debugged their service.  We also use Hulu because their content is more current, but, on occasion, the lag can be unbearable. Hopefully, Coinstar can hit the web spinning out stutter-free content, but, I would bet that it'll be a shaky service for a long period.

So, now, I'm back to deciding on whether to hold onto my Coinstar shares. When I bought the stock in November of last year, it had hit my Karma screen. This screen is based upon thirteen sentiment and fundamental factors. Twelve of those factors were flagged as positive when I made my purchase. Currently, it fails on only three factors: inventory levels have been rising, it has a current ratio below 1.0 and the Graham Formula indicates a value that is below 90% of the current market price. However, the other positive factors are going to keep me in this equity for now. But, I'll be reviewing the next quarter's results to see if management's "U-Recovery" in DVD rentals was really just wishing and hoping and that people are now using DVDs for drink coasters while they sit in the recliner and play with their mobile device.

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