Coinstar Earnings Preview: DARK Clouds Coming?

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

Coinstar (NASDAQ:CSTR) will report its Q2:12 (June) results after market close on Thursday, July 26, and host a call at 2:00pm PT (dial-in: 800-299-8538, passcode: 52925639, webcast: IR section of www.coinstarinc.com).

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Expecting Q2 upside. We expect results to exceed our estimates for revenue of $550 million, compared to consensus of $545 million and guidance of $525 – 550 million, and for EPS of $1.26, compared to consensus of $1.16 and guidance of $1.09 – 1.24. In our view, Q2 guidance, which implies revenue growth of 21 – 26%, is very conservative given the 20% price increase for standard DVDs implemented in Q4:11, kiosk growth (we estimate 15% for Q2), Netflix (NASDAQ:NFLX) attrition (an estimated ≈ 11 million DVD subs lost in the last year), and solid box office for Q2 DVD releases (we estimate up 13%). The NCR acquisition should have a minimal impact on Q2.

On June 25, Coinstar announced the completion of its acquisition of certain assets of NCR’s entertainment business, including DVD kiosks, inventory, IP, and certain retailer contracts. According to Coinstar, for 2012, the acquisition will result in a decrease of $0.40 – 0.50 to diluted EPS from continuing operations, and a capex increase of $40 – 45 million. Although it will likely impact FY:12  EPS results, we view the transaction as a positive, as it should be accretive sometime in 2013, and it allows Redbox to absorb a close competitor and expand its footprint.

We expect Coinstar to lower FY:12 EPS guidance. At the end of Q1:12, Coinstar disclosed that the NCR acquisition was not included in full-year guidance for revenue of $2.155 – 2.280 billion and EPS of $4.40 – 4.80. As the transaction has now closed, we expect overall EPS guidance to be lowered, as a $0.40 – 0.50 hit is unlikely to be fully offset by Q2 outperformance. In addition, many variables remain (interchange fees and workarounds, among others), and management has shown a penchant to be very conservative when providing guidance.  Excluding the onetime dilution from the NCR acquisition, we think that Coinstar could earn close to $5.50 in 2012.

Maintaining our OUTPERFORM rating and our 12-month price target of $88, which reflects a multiple of 16x our 2013 EPS estimate of $5.50. This is a slight discount to Coinstar’s historical valuation to reflect competition, an uneven visibility outlook, and long-term technology challenges.

Michael Pachter is an analyst at Wedbush Securities.


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