Coinstar, Inc. (CSTR), Netflix, Inc. (NFLX): This Company’s Transition to a Value Play is Great for Investors

Why a DVD decline could be good for Coinstar

A marginal decline in DVDs could actually be good news for Redbox as it will be more impactful to the competition – the few remaining brick and mortar competitors.

If and when the economics disfavor brick and mortar services, Redbox will pick up substantially all of the customers left with no other alternative. Most importantly, these converts will be acquired with no new financial investment.

Not to mention that a geographic monopoly will give Redbox pricing power as it will be the only provider of new releases in physical form in the most convenient delivery system possible – a low cost, widely-distributed vending machine.

Could it get better than that? Why yes – it can!

A capital allocation story

In the fourth quarter of 2012, Coinstar, Inc. (NASDAQ:CSTR) reported that it spent $53.3 million on capital expenditures for its Redbox segment. Of that $53.3 million, $52.2 million was growth-related. The remainder, $1.1 million, was maintenance capex – money spent to keep its already existing machines in working order.

Take notice: once placed, a Redbox kiosk requires very little to no additional investment.

Redbox will continue to spew earnings that can be paid out in cash for as long as the machines stay standing. Few companies offer that kind of profitability.

Coinstar deserves a high valuation. An enterprise value of only 7 times free cash flow greatly undervalues Coinstar’s continuing operations and plans to reinvest much of its anticipated $700 million in free cash flows over the next three years into share repurchases and dividends.

Smart capital allocation will be a boon to shareholders who can see through an empty short thesis. Stay long and strong – Coinstar, Inc. (NASDAQ:CSTR) is far from dead.

The article This Company’s Transition to a Value Play is Great for Investors originally appeared on Fool.com and is written by Jordan Wathen.

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