Last week, I wrote why I went long Coinstar (NASDAQ:CSTR). I’m even more pleased than I was last week for two reasons: one piece of news I overlooked and another that makes Coinstar a kiosk monopoly.
The first bit of news was that Family Dollar Stores (NYSE:FDO) made a deal with Coinstar to put the company’s Redbox kiosks outside its stores. That means another 7,100 kiosks will be landing at a Family Dollar near you. Of course, it stands to reason that this won’t be the only dollar store that makes this deal. My favorite chain, Dollar Tree (NASDAQ:DLTR), has 4,450 locations, Dollar General (NYSE:DG) has slightly more than 10,000, and there’s also several thousand locations of privately held Ninety-Nine Cent Stores.
Given Redbox’s low-cost concept, it’s a perfect fit, and you have to figure there are more of these deals to come.
On top of this came the news that Coinstar has purchased all of the Blockbuster Video kiosks that the company had rolled out just prior to bankruptcy.
The deal is expensive — $160 million when you tally up the costs to get the kiosks, and to retrofit them as Redbox outlets. That’s another 10,000 locations. So while the deal will slap Coinstar’s earnings to the tune of 50 cents per share this year and chew away at its free cash flow, it also significantly expands CSTR’s footprint.
Unlike some short-sighted analysts, however, I don’t believe this is the only play with Coinstar’s kiosk platform.
As we’ve seen with the deal with Starbucks (NASDAQ:SBUX) to sell coffee through the kiosks, there are an unlimited number of products that could be sold in this manner. It will take years and capital, but Coinstar is not in any rush, and as the company continues to expand its footprint, it makes competition increasingly difficult to penetrate Coinstar’s beachhead.
Coinstar remains a long-term value play. Even with the earnings hit from the deal, EPS is poised to grow at 20% this year, and yet Coinstar still only trades at 15 times earnings. The company’s cash position is probably about equal to debt at this point — around $190 million — and CSTR has no trouble whatsoever meeting interest payments.
I reiterate Coinstar as a long-term buy-and-hold investment.
As of this writing, Lawrence Meyers was long CSTR. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.