Coinstar, Still Worth Shorting

November 9, 2009

As some of you may recall, I called Coinstar an attractive short target some months ago, and it didn’t exactly go so well. In fact, it did go exactly as high as $38.28, when I called for the short at $25.91. Of course, that was during a massive stock market rally; one of the purposes of short selling is to reduce your exposure to broader market movements, which tends to work against you when you have short something that is highly correlated with the indexes during a rally.

However, with their recent earning announcement last Thursday/Friday, Coinstar very kindly gave up $3, dropping back to $29, and despite today’s rally they have regained none of that ground. And all this, despite beating analyst estimates for the quarter by a considerable margin. Of course, I’ve never understood the obsession with beating analyst earnings; if the company fails to beat the estimates the stock gets punished as if it’s the company’s fault rather than the stupid overoptimistic analysts’.

redboxBut as for Coinstar, it is true that they have increased their sales by $90 million since the same quarter last year, but do you happen to know by how much they increased their profits? Less than $2 million. So it is clear that we are dealing with a low profit margin firm, and now one that is facing increased competition from Blockbuster kiosks, as well as having to deal with Netflix and several antitrust suits that I don’t think they’re going to win. As I mentioned before, when Coinstar bought out its co-owners the price paid implied a value of $300 million for the entire Redbox division, and the counterparty was a sophisticated seller that had access to inside information, that probably concluded that the business was not likely to generate excess returns from any more capital put in, and based on these margins I am inclined to agree. Their other divisions have been more or less flat, so I remain unconvinced that this company is going to produce the kind of growth that will justify their still-optimistic valuation.

Accordingly, I continue to short Coinstar and suggest that the rest of you, if you do short, short this one too.

P.S. I couldn’t miss out on this little gem from the conference call. From

“We closely track consumer satisfaction by measuring our net promoter scores. As you can see on slide five, we continued to hoverer [sic] north of 80%, which puts us with such companies as Apple, Google and, iconic brands that have been established over a much longer time.”

Yes, I suppose they are comparable to Apple, Google, and…in this small and almost completely irrelevant aspect.

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