Is Coinstar Looking at a Super Second Half?

The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.

Coinstar (NASDAQ:CSTR) Q1 EPS was driven by lower-than-expected direct operating expenses. Revenue was $575 million, compared with our estimate of $600 million, the consensus estimate of $579 million, and guidance of $568-$593 million. Non-GAAP EPS was $0.93 (excluding a $0.15/share charge for a loss from equity method investments), compared with our estimate of $1.00, the consensus estimate of $0.86, and guidance of $0.77-$0.92. The EPS beat was driven primarily by lower-thanexpected direct operating expenses.

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Adjusting our FY:13 estimates. We are decreasing our FY:13 estimate for revenue to $2.56 billion from $2.59 billion to reflect the Q1 top-line miss, but raising our EPS estimate to $5.60 from $5.33 to reflect guidance and better-than-expected direct operating expenses in Q1. We are maintaining our FY:14 estimates for revenue of $2.82 billion and EPS of $6.50, but expect results to be more heavily weighted towards the second half of the year, similar to FY:13.

Q2:13 guidance was well below the levels we had expected. Top-line growth will be challenged by another weak release slate, while earnings will be negatively impacted by the closure of the remaining NCR kiosks and intangibles amortization, incremental interest expense from the new notes, and equity method investments including Redbox Instant.

Conservative Q2:13 guidance implies a very strong 2H:13. 2H will benefit from improving comps (expected to be positive by year-end), driven by stronger releases, new marketing strategies, and NCR kiosks entering the comp calculation, as well as lower NCR charges, among other factors.

Redbox revenue growth continues to lag kiosk growth. Redbox revenue increased by only 1 percent y-o-y despite a 19 percent increase in total kiosks. In addition, total installs guidance remains underwhelming, ending 2012 with 43,700 kiosks, but expecting only 2,000-3,000 more installations in 2013. These two factors will accentuate concerns that the DVD rental market is quickly approaching saturation.

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Maintaining our OUTPERFORM rating and raising our 12-month price target to $78 from $66, which reflects a multiple of ≈ 12x our 2014 EPS estimate of $6.50. This is a discount to its historical valuation to reflect recent rental demand declines, increasing competition for the Verizon (NYSE:VZ) JV, the negative impact of the NCR kiosk acquisition so far, uneven profitability, and long-term technology challenges.

Michael Pachter is an analyst at Wedbush Securities.

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