Mediaboss Marketing

By Justin Carley - February 7, 2012 | Tickers: CSTR | Comments

Justin is a member of The Motley Fool Blog Network -- entries represent the personal opinions of our bloggers and are not formally edited.

Coinstar (NASDAQ: CSTR) reported blowout 4Q11 earnings and the stock is exploding higher today.  The stock is now up 26% versus just 8.6% for the S&P 500 since I recommended it here in late December.  The call was based on valuation and the anticipation of steady performance in the operating units - namely Redbox.  It was a surprise to see such great quarterly numbers, but the original thesis still holds - investors should continue to buy shares in the stock.

Blowout

The company reported 4Q sales of $520 million and earnings-per-share of $1.00.  Earnings were ONLY 54% ahead of consensus expectation at $0.65.  The last time the company produced such a big outperformance was on April 29, 2010.  Then they reported 1Q10 EPS of $0.41 versus expectations of $0.14.  The stock popped 16% on the day.  Then what happened?  As I often highlight, it continued to move in its original direction.  The stock ultimately advanced another 30% over the next two months in the face of a declining equity market. 

The original thesis holds with the stock trading at a still muted 16.5x price-to-earnings ratio.  That seems like a bargain against a 3-year CAGR in EPS of 69%.  Certainly that won’t continue in perpetuity, but that P/E ratio is cheap for a mid-teens grower as well.  The company ended the fiscal year with $227 million in free cash flow (operating cash flow less capex).  That produces a very attractive FCF/EV ratio of 12%.  Levels in this ratio above 10% indicate very cheap stocks, but it is just one ratio and usually isn’t followed in the mainstream enough to make a material difference over shorter time horizons.

Guidance

While I am a bit skeptical of using management guidance to value a stock; it can have some merit if you have strong conviction in the numbers or realize that it is just one aspect in the whole valuation process.  Management was nice enough to provide their forecast for fiscal 2012- 

Consolidated revenue between $2.075 billion and $2.250 billion; Core adjusted EBITDA from continuing operations between $425 million and $460 million; Core EPS between $3.80 and $4.30 on a fully diluted basis; and Free cash flow from continuing operations between $120 million and $145 million.

The key points here are EPS growth of 12% at the mid-point of guidance.  Sales are forecasted to grow 17% at the mid-point of guidance.  The forward EV/EBITDA is a paltry 4.2x.  That is super cheap against a range of 6x to 10x since the company became an owner in the Redbox brand.   Free cash flow will be half as much next year with the company planning higher capital expenditures.  I think this should be viewed as a modest negative even though it is necessary to continue to gain share in the DVD rental market.  It is also likely reflective of the just announced joint venture with Verizon.

 Bottom Line

Coinstar remains a great to stock for investors.  The company passed on a 20c price increase and saw limited demand impact, highlighting the strong penetration of the Redbox brand.  I think the company can continue to be a double-digit EPS grower and ultimately initiate and grow a dividend.  Valuation is cheap and these future catalysts should propel the stock higher over the coming years. 

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Justin Carley

Justin Carley is a member of The Motley Fool Blog Network.

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