Best known for its Redbox line of DVD rental kiosks, CoinStar (NASDAQ:CSTR) was thrust into the limelight a few years ago after Netflix (NASADQ:NFLX) pretty much singlehandedly forced Blockbuster into bankruptcy. But where Blockbuster failed to recognize the threat of online streaming services, Netflix attempted to pull the plug on the DVD rental business too quickly.
CoinStar investors jumped on the shares with abandon, especially in the wake of Netflix’s Qwikster debacle. In fact, Redbox ballooned to more than 35,000 DVD kiosks last year. However, it didn’t take Netflix long to regain its feet, reporting during its most recent earnings report that lost DVD memberships narrowed to just 380,000 last quarter from 2.8 million a year ago. Furthermore, Netflix also added more than 5 million streaming subscribers in 2012.
Heading into tonight’s quarterly earnings report, CoinStar investors are left wondering how much longer the DVD rental business will remain profitable. Early indications are not good for CoinStar; the company announced last week that it is shutting down an assembly plant in North Carolina. That said, any weakness from this plant closure or declining DVD rentals will likely be spun as transitional costs of launching the company’s streaming service.
Taking a look at the numbers, Wall Street is expecting earnings to fall 27% year-over-year to 73 cents a share, with revenue seen rising 12% to $580 million. Guidance will also be important, and the consensus has set its sights on earnings of $5.15 a share for fiscal 2013, on revenue of roughly $2.5 billion.
Drilling down on analyst activity, however, reveals much higher expectations. For instance, EarningsWhisper.com reports that CSTR’s whisper number arrives 10 cents higher at 83 cents a share. Furthermore, eight of the 13 analysts following the stock rate it a “buy” or better, compared to four “holds” and one “sell” rating.
That said, the brokerage bunch appears to be alone in its optimistic outlook for CSTR. Specifically, nearly 13 million CSTR shares are currently sold short, representing a whopping 47% of the stock’s total float (or shares available for public trading). Meanwhile, options traders are also placing sizeable bets against the shares, with the February/March put/call open interest ratio arriving at 1.10 — meaning that puts outnumber calls for the front two months of options.
The bottom line is that unless CoinStar is making real progress in its quest for a viable online streaming service, any weakness in DVD rentals could prompt a short-term selloff for the stock. There is also the risk of exaggerated selling pressure if analysts are forced to reconsider their “buy” ratings on the stock.
According to February option implied volatility, traders are pricing in a post-earnings move of about 13%. For those looking to bet on an earnings-related CSTR drop, a 45/50 bear put spread falls well within the expected move. That said, unless you can stomach the risk of trading front-month options, the March series may be a better month in which to set your trade.
At the close of trading on Wednesday, the March 45/50 bear put spread was offered at $1.95, or $195 per pair of contracts. Breakeven lies at $48.05, while a maximum profit of $3.05, or $305 per pair of contracts, is possible if CSTR closes at or below $45 when March options expire.
At the time of publication, Hargett had no positions in the securities mentioned.