Sometimes, the intelligent quotient of the market is remarkably low. Institutional investors are adept at taking advantage of this fact with a manufactured story that results in the masses taking the bait. Case in point is Friday’s selloff in Coinstar (NASDAQ:CSTR).
The owner and operator of the DVD rental system Redbox saw its shares drop 7% after the company reported earnings that crushed estimates. That’s right — Coinstar delivered a stellar earnings report and the stock is getting whacked. Why?
Netflix (NASDAQ:NFLX). The massive blow-up of the former high-flyer has made Coinstar an easy target. The argument easily spread by hedge fund short sellers is that, like Netflix, Coinstar will be easily bumped from its perch by competition from streaming movies or bigger players that eventually will take over the kiosk model.
The story is easy to sell to gullible investors, but the case against Coinstar is thin. The simple explanation for the selling was that CSTR somehow disappointed investors by lowering guidance for the fourth quarter. In reality, the company raised guidance for the full year thanks to a huge beat in the third quarter. Indeed, guidance for the fourth quarter was less than what Wall Street was looking for, but net-net, the company is ahead of the game. Anyone with half a brain can understand why the outlook for the fourth quarter is lower: Management is being prudent.
Coinstar is raising prices on its rentals from $1 to $1.20, and it knows there might be a slight push-back from consumers, a la Netflix. At the same time, economic uncertainty is enough to make any management team take a more cautious approach to running its business. But does that conservative stance mean the company should be valued any less? I don’t think so. At the end of the day, CSTR is going to put up an annual profit number higher than what Wall Street was looking for before earnings were released.
As for comparisons to Netflix, there is no comparison. The two situations are entirely different. Here are three reasons why:
Anyone comparing Netflix to Coinstar clearly has a limited grasp on the importance of valuation. Prior to releasing earnings, Wall Street was looking for Coinstar to make $3.09 per share in 2011. For 2012, the estimate was for the company to make $3.79. That represents a jump of 23%. At Thursday’s close of $52.95 per share, Coinstar was trading for a very modest 17 times current-year estimates of earnings.
Netflix was an entirely different story. Prior to NFLX releasing earnings, management had made a series of massive missteps that justifiably raised issues with respect to future earnings. At the same time, shares of Netflix traded for a hefty 27 times current-year estimated earnings. It doesn’t take a doctorate to realize that if earnings are in question, valuation must come down.