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Coinstar (CSTR): Calling Heads Ahead Of Earnings

 February 07, 2013 03:15 PM

(By Kevin Donovan) Got a mayonnaise jar full of loose change?  We suggest taking it to your broker and plopping it down with a buy order for Coinstar ahead of its earnings release later today.  We think it's worth a bet that this heavily shorted stock could pop significantly higher if results beat estimates.

Coinstar provides automated retail solutions, owning and operating self-service Redbox kiosks that let customers rent or purchase movies and video games and self-service coin-counting kiosks at which customers can convert coin to cash, a gift card or an E-certificate.  It also engages in identifying, evaluating and building new self-service concepts.  The company has approximately 42,400 Redbox DVD kiosks and 20,300 coin-counting kiosks in supermarkets, drug stores, mass merchants, financial institutions, convenience stores and restaurants.  Redbox also offers DVD rentals through additional kiosks acquired from NCR Corp. last year.

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For the record, analysts' average estimates calls for earnings per share of $0.73 for the quarter ending in December on revenue of $580.19 million, compared with $1.00 and $520 million in the year-ago period.  Forecasts range from $0.60 to $0.80 for EPS and $560 million and $599 million for revenue. 

Coinstar has beaten estimates in each of the last four quarters, a good sign.  But more importantly, short positions in the shares is an eye-catching 43.3% of float, despite a rise in Coinstar shares of about 10% in the last three months.  That means share price appreciation could have much more to go as short-sellers cover their positions to cut losses or lock in what gains remain.

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In addition, we are encouraged by an impressive list of owners with significant stakes in the  $1.55 billion market-cap company.  Goldman Sachs is the largest single shareholder with about 10% of shares outstanding.

Even without the short-selling fuel waiting on the sidelines, we think there is value in Coinstar shares, which trade at a price-to-earnings/growth ratio of just 0.59.  The company has suffered from the perception that the DVD rental business will continue to decline as streaming rentals gain share.  But Coinstar has joined forces with Verizon to offer a streaming service that could be a new source of growth.

And if the company can beat estimates and be relatively upbeat about the future, its shares could replicate the recent surge in those of competitor Netflix.

So we think Coinstar has three things going for it: significant short positions, savvy investors and cheap valuation.  Oh, and a fourth  – an empty mayonnaise jar to fill up again with profits if our thesis proves right.


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