Coinstar Earnings Preview: Deep Stock Analysis

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

Coinstar (NASDAQ:CSTR) will report its Q3:12 (September) results after market close on Thursday, October 25, and host a call at 2:00pm PT  (dial-in: 888-895-5271, passcode:  33442426, webcast: IR section of www.coinstarinc.com).

Expecting Q3 upside. We expect results to exceed our estimates for revenue of $575 million, compared to consensus of $561 million and guidance of $550 – 575 million, and for EPS of $1.25, compared to consensus of $1.16 and guidance of $1.09 – 1.24. Q3 guidance implies revenue growth of 18 – 24%, which appears conservative given the 20% price increase for standard DVD rentals implemented in Q4:11, kiosk growth (we estimate 16% y-o-y), and Netflix attrition (an estimated 0.59 – 0.89 million DVD subs lost in Q3). Further, we estimate solid box office for Q3 DVD releases of up 9% despite an impact from the Olympics.

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Management is unlikely to fully pass through any Q3 beat to FY guidance for revenue of $2.21 – 2.31 billion and EPS of $4.60 – 4.90. Management has a history of conservative guidance, and we believe Coinstar faces many variables, including startup costs for Redbox Instant by Verizon (NYSE:VZ) and the NCR kiosk dilution.

We expect details on pricing and features for Redbox Instant by Verizon soon, causing downward pressure on Coinstar shares. We believe Coinstar may provide details about the service as early as its Q3 earnings call due to a statement by a Verizon executive that it will launch in time for the holidays (we expect a November launch). Increasing streaming competition (from Amazon and Netflix, among others) limits the opportunity in our view; we don’t expect Redbox Instant to be competitive, and we continue to believe that the potential for steep capital contributions (as much as $158 million) could pressure Coinstar shares.

Expect management to provide more detail on the impact of the NCR acquisition. Last quarter, management raised full-year guidance to $4.60 – 4.90, including $0.40 – 0.50 in dilution from the acquisition, but was unclear as to the timing of the charges. We expect phasing of ≈ $0.20 – 0.25 in both Q3 and Q4, and expect management to clearly state the Q3 impact and what to expect in Q4. We estimate 2013 EPS accretion of $0.50/share given 2,500 – 2,900 kiosk guidance.

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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