Imagine a world where the shopping experience is dominated by the automated kiosk. Instead of having to travel between different stores and restaurants, kiosks would allow the consumer to purchase everything from vegetables to videogames in one convenient location. While this may seem like something out of Idiocracy – a dystopian Luke Wilson-led flick available at your nearest Redbox – it’s far less indolent. Most likely, kiosks would be grouped in hubs scattered throughout cities, so their services would still require you to leave the house, which is more than can be said about online retailers like Amazon.com (NASDAQ: AMZN) or eBay (NASDAQ: EBAY).
Though Coinstar is most known for its aptly named Coinstar and Redbox kiosks, the company is hard at work to expand its empire of automated machines. In fact, it has recently teamed up with Starbucks (NASDAQ: SBUX) to build around fifty prototype coffee dispensers that serve piping hot Seattle’s Best brew with a cheery robotic smile. Moreover, Coinstar is developing a host of other kiosks including: (1) the Star Studio photo booth, (2) a refurbished electronic dealer named Gizmo, (3) a gift card exchange system called Alula, and (4) a fresh food dispensary. Execs have touted that by 2015, the company’s retail partners Kroger (NYSE: KR), Walgreen’s (NYSE: WAG), and Wal-Mart (NYSE: WMT) will have each of these kiosks at their entrances.
From a revenue standpoint, Coinstar’s first two machines have been quite a success, with most growth coming from its Redbox movie rental service. Over the past three years, the average revenue per Redbox kiosk has increased from $3,500 a month to $4,200 a month. This expansion has been driven by a same-kiosk sales growth of 20 percent per year over this same time period. Additionally, the total number of kiosks in service has more than tripled; there are currently over 35,000 on the streets today. While the company has experienced some economies of scale in the form of lower construction and installation costs, it does face consistent DVD content costs of $1,750 a month. Moreover, there is also a cost to rent the space and pay technicians, which amounts to a comparable monthly amount. As a result of rising revenues, the company has seen its earnings per kiosk nearly triple since 2009; it currently sits around $550 per machine.
On the whole, CSTR has grown its annual revenue by an average of 34.3 percent over this time, which is significantly higher than the specialty retail industry’s standard of 7.5 percent, and competitors like Netflix (NASDAQ: NFLX), and NCR Corp (NYSE: NCR). Likewise, CSTR has grown its earnings in an equally impressive manner, reporting an EPS of $3.26 last year. After blowing away the Street’s outlook in the first quarter with an EPS of $1.65, the majority of analysts improved their year-end estimates for the company, with most expecting earnings to eclipse $5.00 a share.
Interestingly, shares of CSTR are trading at a Price-to-Earnings ratio (12.1X) below the industry average (28.8X), and its own 10-year historical average (20.7X). In fact, Coinstar’s earnings have historically traded at a 22 percent premium to the S&P 500’s average. This year, they are cheaper, trading at a 14 percent discount. Using a modest year-ahead EPS forecast of $4.88 in conjunction with CSTR’s historical average, we can set a price target of $101.02 by next summer. Heck, even if earnings somehow were to stay flat, a fairly valued CSTR would flirt with $70 a share. With the stock currently trading near $60, a return of at least 15 percent seems very plausible.
Moreover, the company has managed its cash hoard quite nicely over the past year, growing free cash flow by 75 percent in 2011. The markets have yet to take notice, as CSTR has a Price-to-Cash Flow ratio (4.6X) that is way below the industry average (12.8X), and its own 10-year historical average (7.3X). The company does not currently offer a dividend, as it continues to invest its excess cash to build its army of automated kiosks. Coinstar has become quite capable of generating a solid return on this investment, as its Return on Invested Capital ratio is around 20 percent, compared to an ROIC of just 2 percent three years ago.
Looking forward, now may be the best time to buy Coinstar, as it offers investors a unique combination of growth and value.
Disclosure: The author has no holdings in the stocks mentioned in this article and has no plans to initiate any positions within the next 72 hours. He does, however, have the intention of rating these stocks on WealthLift.com, a social media website where investment ideas are shared openly and free.