DEEP ANALYSIS: Cointstar Investors Seem Confused by This

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

Coinstar (NASDAQ:CSTR) reported mixed Q2 results, with revenue below expectations and with EPS above. Revenue came in at $532 million, compared to our estimate of $550 million and the consensus estimate of $545 million. EPS was $1.25, a penny below our $1.26 estimate and well above the consensus estimate of $1.16

EPS guidance was raised significantly, in a somewhat confusing manner. Full-year revenue guidance is $2.21 – 2.31 billion, compared to our $2.31 billion estimate and the consensus estimate of $2.28 billion.  EPS guidance was raised to $4.60 – 4.90, including $0.40 – 0.50 dilution from the NCR acquisition, compared to prior guidance of $4.30 – 4.80 excluding the dilution. Thus, overall guidance was raised by approximately $0.50 – 0.60.

Unfortunately, analysts and investors appear confused by the quarterly guidance for the balance of the year, sending Coinstar shares sharply lower.  Management expects EPS of $1.09 – 1.24 for Q3, implying EPS of somewhere around $1.00 for Q4.  While the company clearly stated (several times) that the guidance included dilution from NCR, it is not clear when the dilution impacts earnings, given that the deal closed in Q2. We believe the sharp sell-off resulted from the appearance that EPS will decline sequentially throughout the year, giving credence to the bear thesis that Coinstar faces secular challenges.

Little detail was provided about the Verizon (NYSE:VZ) Joint Venture, other than the name “Redbox Instant by Verizon”.  It is clear to us that investors are confused about the potential contribution or dilution from the JV, and have been waiting for over two years for details. In our view, the JV will likely incur losses in the current fiscal year, and it is not clear to us that it will be accretive in 2013.

We maintain our FY:12 estimates for revenue of $2.31 billion and for EPS of $5.20, with slight adjustments given revised guidance. We are maintaining our FY:13 estimates for revenue of $2.64 billion and for EPS of $5.50.

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.