by Lawrence Meyers | June 13, 2012 10:00 am
I loved the Coinstar (NASDAQ:CSTR) machines when they first came out because I was a coin-sorting geek when I was a kid, and none of the battery-operated auto-sorters ever worked all that well. But I was skeptical of the business model because, sooner or later, Coinstar would saturate the market for coin counting.
Then Redbox came along. That’s when I realized Coinstar might be onto something even bigger.
The recently announced deal with Starbucks (NASDAQ:SBUX) is proof positive to me that the kiosk vending concept will not only work, but will be a blockbuster for Coinstar (and maybe aid an ailing coffee company).
Remember the old days when aspirin and contraceptives were sold in those clunky vending machines in bathrooms? Think about all the different products the company can sell.
For example, how about the most basic prescription drugs? Coinstar could make a deal with Express Scripts (NASDAQ:ESRX) to carry them.
Think that maybe concert tickets could be purchased, in a deal with Live Nation Entertainment (NYSE:LYV)?
How about the fact that coin-counting is the first step toward doing things like money transfer and purchasing gift cards, and therefore it could steal business from Western Union (NYSE:WU)?
If you get the idea that the list is endless, you’d be right, which makes me think of another endless selection vendor: Amazon (NASDAQ:AMZN). Now think about the fact that Coinstar carries no inventory. It doesn’t supply the product. It merely is a distribution outlet, and as anyone knows, distribution is where the money is. Coinstar has first-mover and branded advantage.
Most of all, Coinstar’s stock is surprisingly cheap — dirt cheap. The stock trades at 13 times this year’s earnings on 33% earnings growth, with FY13 earnings expected to grow 11%, and 18% long-term annualized growth. The company has $140 million in net cash, and FY2011 cash flow was huge: $227 million.
I went long Coinstar after the Starbucks announcement and intend to hold for a very long time.
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.
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