The Statement Investors Didn’t Want To Hear: Verizon Communications (VZ), Coinstar Inc. (CSTR)

The Ugly
Most customers have a Redbox kiosk within easy driving distance from their home. If they signed up for Redbox Instant, they would get streaming, current DVDs and Blu-rays, and video games all from one service. This is something that neither Netflix nor Amazon can match.

While Redbox was expanding, the convenience of these locations got better and better. The problem is, Coinstar said that, “new (Redbox) kiosk installs (would be) reduced substantially in 2013 and beyond.” I’ve researched Redbox’s addressable market in the past, and found that in the U.S. alone there are about 36,000 grocery stores and over 146,000 convenience stores. With under 44,000 Redbox kiosks, it seems the company could expand for a while. However, with the company only expecting to add 500 to 1,000 kiosks in 2013 and then a reduced number beyond that, the company just told investors they have reached saturation in the U.S.

Where Do We Go From Here?
If you want a play on the Redbox Instant service, Verizon is the way to go. Verizon owns the majority of the service, and can offer it as an add-on to its huge wireless customer base. With Verizon stock paying a 4.6% yield, and the company generating billions of free cash flow each quarter, this is a much safer bet. If investors want a high-risk, high-reward option, either Netflix or Amazon could be a good option. Both stocks sell for forward P/E ratios of over 100, but it seems likely that these two will rule the streaming video business. Of the two, I prefer Amazon because the company’s business isn’t solely reliant on the streaming business. Amazon’s huge retail operations and growing hosting business give diversification to the revenue stream that Netflix lacks.

In the past, Coinstar looked like a good value, and on the surface not much has changed. Shares trade for about 10 times earnings, and analysts expect over 17.5% EPS growth. The problem is, this growth story gets much more difficult to believe with the Redbox concept reaching saturation. With new installs slowing down dramatically, same-store sales will have to carry the brand. Same-store sales were down 4% in the last quarter, and I’m worried this is the beginning of a slow decline. It’s going to be a few years before investors know if Redbox Instant will be a hit, but I wouldn’t suggest waiting around to find out.

The article The Statement Investors Didn’t Want To Hear originally appeared on Fool.com and is written by Chad Henage.

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