Coinstar Crushes Expectations on the Back of Redbox Dominance

Coinstar’s (NASDAQ:CSTR) Redbox drove Q4 revenue.  Revenue was $520 million, compared with our estimate of $510 million, the consensus estimate of $498 million, and guidance of $485 – 510 million. The upside was from: (1) strong DVD releases, (2) low price elasticity from the price increase, (3) Blu-ray content, and (4) video games.

Redbox was also a key driver of the Q4 earnings beat.  EPS was $1.00, compared with our estimate of $0.67, the consensus estimate of $0.64, and guidance of $0.57 – 0.67. Redbox saw operating leverage from the standard DVD rental price increase and increased operational efficiencies. Also, interchange rate fees were lower-than-expected.

Coinstar provided initial FY:12 guidance for revenue of $2.075 – 2.250 billion and EPS of $3.80 – 4.30. Guidance includes the expected impact from the Warner Bros. (NYSE:TWX) workaround and interchange fees, but excludes the Verizon JV and NCR acquisition. Increasing our FY:12 estimates for revenue to $2.30 billion from $2.24 billion and EPS to $4.40 from $4.20 to reflect results and guidance. Initiating our FY:13 estimates for revenue of $2.64 billion, EPS of $5.50. Neither set of estimates includes contribution from the Verizon JV or the NCR acquisition.

NCR acquisition a clear positive. Pending an antitrust review, Coinstar will purchase the assets of NCR’s DVD kiosk division, including ≈ 10,000 kiosks, certain retail contracts, and DVD inventory, with the transaction to close in Q3. We believe the combination is accretive by $1.00 per share or more.

Verizon (NYSE:VZ) JV will likely compete with Netflix’s (NASDAQ:NFLX) hybrid offering, although there is no indication that the JV will offer unlimited viewing. We estimate that over 11 million of Netflix’s hybrid subscribers quit the service or switched to a streamingonly or DVD-only plan over 2H:11, creating a huge market opportunity either for Redbox on a stand-alone basis, or for a suitable hybrid.

Maintaining our OUTPERFORM rating and our 12-month price target of $72, which reflects a multiple of 16x our 2012 EPS estimate of $4.40. This is a slight discount to Coinstar’s historical valuation to reflect competition, an uneven visibility outlook, and long-term technology challenges.  Coinstar shares remain on the Wedbush Securities Investment Committee’s Best Ideas List.

Michael Pachter is an analyst at Wedbush Morgan.

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