Here’s Why Coinstar is Not Likely to Disappoint

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

Coinstar (NASDAQ:CSTR) will report its Q1:13 results after markets close on Thursday, April 25, and host a call at 2:00pm PT (dial-in: 888-895-5271, passcode:34552619, webcast: IR section of www.coinstarinc.com).

We expect EPS to come in above the high end of conservative guidance. We modeled revenue of $600 million vs. consensus of $579 million and guidance of $568-593 million. Our EPS estimate is $1.00 vs. consensus of $0.86 and guidance of $0.77- 0.92. In the Q4 earnings call, the management provided a number of reasons for weak EPS guidance (down 34-45 percent y-o-y), including fewer January releases, NCR and Verizon (NYSE:VZ) JV charges, and no special rates for interchange costs.

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Coinstar has beaten initial EPS guidance every quarter since Q4:10, and has $380 million left in its share repurchase authorization. Management guided to Redbox samestore sales of low double-digit percentage declines, despite Netflix (NASDAQ:NFLX) DVD subs attrition (guided q-o-q decline of 0.17-0.62 million).

We expect the new management team to set a positive tone with investors. We believe if results were below guidance, the new team would have opted to preannounce disappointing results, rather than risk the wrath of investors.

Despite our optimism about Q1, it is not clear that management will fully pass though any beat, potentially sending a mixed message to investors. FY:13 guidance is for revenue of $2.375-2.555 billion and EPS of $4.91-5.55, vs. our estimates for $2.587 billion and $5.33, respectively. FY guidance implies an operating margin decline notwithstanding an increase in average kiosks of 23%. Key variables include Verizon JV charges ($11-16 million), NCR kiosks ($0.26/share of charges), and New Ventures…

Lowering our FY:13 EPS estimate for the issuance of $350 million of notes and initiating FY:14 estimates. We expect EPS growth once acquisition, debt and new venture costs are charged off. We continue to believe most investors prefer management focus primarily on FCF generation, as opposed to new ventures.

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Maintaining our OUTPERFORM rating and 12-month price target of $66, which reflects a multiple of ≈ 12x our 2013 EPS estimate of $5.33. This is a discount to Coinstar’s historical valuation to reflect recent rental demand declines, increasing competition for the Verizon JV offering, 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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