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Andrew Ruben

CSTR AT A GLANCE

P/E ► 46.4 AVG EV/EBITDA ► 9.46 AVG ROA ► 4% HIGH ROE ► 5.4% HIGH Debt to Equity ► 2.49 HIGH Current Ratio ► 1.11 LOW Interest Coverage Ratio ► 2.93 HIGH

 

 

 

 

 

 

Coinstar(NASDAQ:CSTR) operates coin-counting kiosks in grocery stores. A customer dump coins into a coinstar machine and paper money instead. The company typically charges an 8.9% fee on all coins processed.

Coin-counting is Coinstar's most established business, with their first machines installed in 1992, but the company entered the skilled crane, money transfer, and self-service DVD rental businesses through a series of acquisitions beginning in 2004. While these businesses have diversified the company's revenues, each comes with its own risks.

• Skill cranes are games in which a user controls a crane in an attempt to retrieve an item, usually a toy, from an enclosed display case. This business operates in an industry that is largely mature; sales declined 10% in 2007.^[1]

• The company's DVD rental segment is its fastest growing, with revenue from their self-service DVD kiosks increasing from $2.6 million in the first quarter of 2007 to $60.5 million in the first quarter of 2008.^[2] However, the physical DVD market faces growing competition from online video services, such as Google's YouTube. Online video is quickly growing, with the market for online content expected to reach 131 million households by 2010.^[3]

• Coinstar entered the money transfer service business through acquisitions of Travelex Money Transfer and GroupEx and in May, 2006 and January, 2008, respectively.^[4] A customer can transfers money at a Travelex location to someone who picks up the money from another location. Size matters in the money transfer industry, as larger companies have more transfer locations and are more convenient for clients. Coinstar is at a disadvantage to its larger competitors like Western Union Company (WU) and Moneygram International (MGI), as Coinstar's network operates in 30,000 locations while Western Union and Moneygram have 305,000 and 110,000 locations, respectively.

Coinstar maintains contracts to place their products in retail outlets, most notably Wal-Mart Stores (WMT) and Kroger Stores. These two customers alone accounted for over 36% of Coinstar's 2007 revenue.^[5] Coinstar's contract with Wal-Mart is very one-sided. The giant retailer has the option of canceling or revising the contract at any time. In late 2007, Wal-Mart opted to increase their number of coin-counting machines and DVD kiosks, and decrease their entertainment machines by 50%.^[6]. This resulted in a $65MM write down in 2007.

[edit] Business Financials

Coinstar CSTR is a single-source supplier for retailers, letting them capitalize on the area between the cash registers and front door. Founded in Bellvue, Washington, Coinstar has 1,900 employees and operates over 15,000 kiosks worldwide.

Coinstar operates in four main business segments:

• Coin Services: Coinstar is in the self-service coin-counting market. They operate an automated network of coin-counting machines placed within retail establishments. Customers feed loose change into the machines, which count the coins. The customer can receive a voucher good for the value of coins counted, less an 8.9% transaction fee. Alternatively, they can receive a value card or e-certificate to a partnering retailer, such as Starbucks, Amazon.com, or iTunes.^[7] In this event, Coinstar receives the 8.9% from the partnering retailer, and the customer does not pay a fee. In 2007, the total dollar value of coins processed through the Coinstar network was $2.9 billion.^[8]

• Entertainment Services: Coinstar owns more skill-crane and bulk vending machines than any other company in the United States. For a skill crane machine, the user moves a joystick to maneuver the crane in an attempt to retrieve an item within an enclosed display case. Bulk vending is the sale of unsorted items such as candy, gumballs, and toys, selected at random, and dispensed through a non-electric machine. Compared to regular vending machines, bulk machines are generally smaller and less expensive.^[9] Coinstar acquired ACMI Holdings and The Amusement Factory in July 2004 and November 2005, respectively. With these acquisitions, Coinstar operates over 280,000 pieces of equipment. They make 70% of their entertainment revenue from skill-cranes.^[10] Machines typically cost $0.50-$1.00 per play, and this revenue is shared with the respective retailers.

• E-Payment Services: Coinstar offers E-payment services, including pre-paid debit cards, long distance phone cards, and money transfer services. Of Coinstar's 15,400 coin-counting machines in the United States, approximately 10,700 are enabled with these e-payment options.^[11] The company has gift card partnerships with Sprint Nextel, Verizon, Virgin Mobile , and AT&T.

• Self-Service DVD Kiosks: Coinstar also is in the self-service DVD market. They acquired DVDXpress in October 2007, and acquired majority ownership of Redbox on January 1, 2008.^[12] These kiosks provide the full functionality of a traditional video store. Consumers make a selection, either at the kiosk or online, pay using a debit or credit card, and receive the DVD. Rentals are charged on a per-night basis, until the customer returns the DVD.

Revenue is closely split between financial and entertainment segments. In 2007, DVD rental revenue accounted for $9.5 million. In the first quarter of 2008 alone, rental revenue was over $60.5 million.^[14]

The company is organized into two geographical segments. The North America segment includes business from North America, Canada, and Mexico. The International segment is composed of the United Kingdom and other European countries, with the UK providing the majority of international revenue.^[15] Over 90% of revenue comes from the United States.

Coinstar's revenue has increased over each of the past 5 years. Net income was steady from 2003 until 2006, averaging over $30 million. In 2007, Coinstar had a net loss of $28.6 million. This loss is attributed to a write down of $65.2 million for impairment and excess inventory charges. There were no charges in this category over the previous four years.^[17]

^[18]

[edit] Contract with Wal-Mart

The inventory write down was due to a change in Coinstar's contract with Wal-Mart. Wal-Mart stores have the largest number of Coinstar machines out of any retail partner. In 2007, machines in Wal-Mart accounted for 24.9% of Coinstar's consolidated revenue.^[19] The company will install up to 2700 DVD Kiosks and 2000 coin-counting machines in Wal-Mart stores, a significant expansion. As part of this arrangement, Wal-Mart will be removing or relocating approximately 50% of their cranes, games, and kiddie rides.^[20] Due to the scale back in entertainment machines, Coinstar recorded a pre-tax charge for entertainment assets of $65.2 million in the fourth quarter of 2007.^[21]

[edit] Trends and Forces

[edit] Elimination of The Penny Changes Coin-Counting Habits

Over half of the coins processed through Coinstar machines every year are Pennies.^[22] However, there is talk in Congress of removing the penny from circulation. The Legal Tender Modernization Act of 2002, and the Currency Overhaul for an Industrious Nation Act of 2006 were both efforts to eliminate the penny, but neither act passed.^[23]

The elimination of the penny would affect how people count their coins. People would accumulate less coins, and need to use coin-counting services less frequently. On the other hand, the revenue per coin-counting transaction would increase, given the higher average coin value. Overall, without the penny, people would change how they use machines such as Coinstar.

Coinstar is a large supporter of the penny. They conduct an annual survey to show public support for the penny. Their 2006 poll revealed that 79% of Americans favor keeping the coin in circulation. This number is up from 66% in the prior year.^[24]

[edit] Relationship Changes with Wal-Mart affect Operations and Results

Coinstar's largest retail customer is Wal-Mart. They depend on Wal-Mart for around 25% of their annual consolidated revenue.^[25] This relationship is governed by a contract that Wal-Mart can eliminate at any time.^[26]

Additionally, Coinstar is affected when Wal-Mart chooses to change this contract. Starting in 2007, Wal-Mart is increasing their Coin-Counting and DVD machines, while eliminating a close to half of their entertainment machines. This will substantially shift revenue from different Coinstar segments. Increased demand from Wal-Mart causes Coinstar's revenue to go up, but decreased demand adversely affects revenue.

[edit] Switch to Free Alternatives Hurts Coin-Counting Revenue

Coinstar charges 8.9% per coin-counting transaction. Some banks and other competitors already provide coin-counting free of charge, or for a lower percentage fee.^[27] Commerce Bank offers a free coin counting service, Penny Arcade.^[28] Chevy Chase Bank also offers a free service, Change Express.^[29] Consumers prefer these free services. An expansion of these coin-counting services by any competitors could hurt the results of Coinstar's operations.^[30] People will be less likely to use Coinstar machines, severely hurting coin-counting revenue.

[edit] Emergence of Online Video Affects Physical DVD Rentals

The Online Video market is rapidly growing. The market for online content services was predicted to grow tenfold, from 13 million households in 2005 to more than 131 million households by 2010.^[31][32] There are many options for streaming and sharing videos over the internet, such as Google's YouTube. Coinstar participates in the Physical DVD rental market with their acquisition of DVDXpress, and ownership position in Redbox. If consumers transition away from DVDs and towards these online mechanisms, Coinstar stands to lose. If people can stream movies over the internet, there becomes less reason to rent.

[edit] Competition

Coinstar is a company that operates in multiple, distinct segments. They have different competitors and various competitive advantages in each segment. One overall advantage is that Coinstar is an integrated provider of payment and entertainment services.

[edit] Coin and Currency Services

• Global Payment Technologies (GPTX) Global Payment Technologies manufactures and sells currency validation systems. In addition to Coin Counting, GPTX specializes in paper currency counters. Their 2007 revenue was $10.15 million, with a net income (loss) of ($5.39 million).^[33]

• Cummins-American Cummins-American is a privately owned company. They make and distribute coin and currency sorters, counters, and dispensers. Their products are sold worldwide to banks and government agencies, as well as within the retail and vending industries. 2007 sales were $50.8 million.^[34]

[edit] E-Payment Services

• Cash Technologies Cash Technologies develops and markets data processing products for the financial services industry. The company's CashTechCard System establishes and manages debit card programs. They issue prepaid debit cards, rivaling Coinstar's E-Payment offerings. In 2007, they recorded a net income (loss) of ($3.0 million) on revenue of $314 thousand.^[35]

• Western Union Company (WU) Western Union is the largest company in the money transfer industry. They carry out approximately 400 million payment transactions each year. Coinstar's money network contains approximately 5,000 send, and 25,000 receive locations. Western Union operates more than 335,000 locations worldwide. They earn the 85% of their revenues from consumer-to-consumer transactions.^[36]

[edit] DVD Rental

• Blockbuster (BBI) Blockbuster operates a network of entertainment-related rental stores. Their offerings include videos and DVDs, as well as video games. They also offer movie rentals through the internet and by mail. They operate over 7,800 stores in the United States. 2007 net income was $5.52 billion.^[37] Blockbuster does not operate any DVD kiosks.

• Netflix (NFLX) Netflix offers DVD rental subscriptions over the internet. Movies are delivered through the mail, steering consumers away from physical DVD stores. They additionally let customers to watch select content instantly on their computers. Their rental options differ from Coinstar's kiosk model. They recorded a 2007 net income of $66.9 million on revenues of $1.2 billion.^[38]

[edit] Notes

1. ↑ CSTR 2007 10-K, Financial Statement Note 15, page 64
2. ↑ "Financial Trends", Coinstar.com Investor Relations
3. ↑ "Online Video Market to Grow Tenfold in Five Years", MarketingVOX
4. ↑ CSTR 2007 10-K, Item 1A: Risk Factors, page 16
5. ↑ CSTR 2007 10-K, Financial Statement Note 15, page 64
6. ↑ CSTR 2007 10-K, Item 1A: Risk Factors, page 6
7. ↑ "Free Coin Counting when you turn coins into a Gift Card or eCertificate", Coinstar.com Our Products
8. ↑ CSTR 2007 10-K, Item 7: Management Discussion, page 22
9. ↑ "Introduction to Bulk Vending", National Bulk Vending Association
10. ↑ CSTR 2007 10-K, Item 7: Management Discussion, page 22
11. ↑ CSTR 2007 10-K, Item 7: Management Discussion, page 22
12. ↑ CSTR 2007 10-K, Item 7: Management Discussion, page 23
13. ↑ CSTR 2007 10-K, Financial Statement Note 15, page 64
14. ↑ "Financial Trends", Coinstar.com Investor Relations
15. ↑ CSTR 2007 10-K, Financial Statement Note 15, page 63
16. ↑ CSTR 2007 10-K, Financial Statement Note 15, page 63
17. ↑ CSTR 2007 10-K, Item 6: Selected Financial Data, page 20
18. ↑ CSTR 2007 10-K, Item 6: Selected Financial Data, page 20
19. ↑ CSTR 2007 10-K, Financial Statement Note 15, page 64
20. ↑ CSTR 2007 10-K, Item 1A: Risk Factors, page 6
21. ↑ CSTR 2007 10-K, Item 7: Management Discussion, page 24
22. ↑ "Penny Dreadful", March 31 2008 New Yorker Magazine
23. ↑ "Anti-Penny, Pro-Rounding Bill Introduced in Congress", July 18 2006 CNNMoney.com
24. ↑ "Support for Penny Grows Stronger as Congress Favors Elimination", Coinstar.com Press Release
25. ↑ CSTR 2007 10-K, Financial Statement Note 15, page 64
26. ↑ CSTR 2007 10-K, Item 1A: Risk Factors, page 6
27. ↑ CSTR 2007 10-K, Item 1A: Risk Factors, page 8
28. ↑ "Commerce Bank's Free Change Counting Machines Ease Region's Coin Shortage", CommerceOnline.com Press Release
29. ↑ "Chevy Chase Bank - Change Express", Chevy Chase Bank - About Us
30. ↑ CSTR 2007 10-K, Item 1A: Risk Factors, page 8
31. ↑ "Online Video Market to Grow Tenfold in Five Years", MarketingVOX
32. ↑ "Online Video Stats Say it All", eMarketer.com
33. ↑ Global Payment Technologies Inc. (GPTX.OB), Yahoo Finance
34. ↑ Cummins-American Corporation, Hoovers
35. ↑ Cash Technologies, Inc. (TQ), Yahoo Finance
36. ↑ The Western Union Company, Hoovers
37. ↑ Blockbuster Inc. (BBI), Yahoo Finance
38. ↑ Netflix, Inc., Hoovers