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Analyst Drops Coinstar/Redbox From ‘Best’ List

29 Feb, 2012 By: Chris Tribbey, Erik Gruenwedel

Coinstar CEO Paul Davis says Redbox’s workaround program is working for 56-day embargoed releases from Warner Home Video, but Wedbush Securities analyst Michael Pachter isn’t so sure, dropping the company from his Best Ideas List.

Pachter is maintaining an “outperform” rating on the stock, believing its current $62.10 per share valuation can reach $72 in the next 12 months.

That said, the analyst says Redbox has positioned itself with myriad “unique” moving variables, including the pending Blockbuster Express acquisition, a fuzzy digital partnership with Verizon, the ongoing decline in Netflix’s by-mail disc business, increasing interchange fees (from banks) and the disc-rental price hike.

More importantly, Redbox’s 28-day embargo agreement with Universal Studios Home Entertainment expires next quarter. A similar deal with 20th Century Fox Home Entertainment expires in 2013.

“We expect Universal and Fox to potentially follow suit, making a workaround far more difficult to manage,” Pachter wrote in a Feb. 29 note. “We are reminded of late 2009, the last time Coinstar was forced to workaround … and the company’s earnings suffered significantly. While we don’t necessarily expect a repeat of the last workaround, especially given that the current one is working from day 28 to day 56, we are concerned that the outcome could be messy.”

Pachter says the joint venture with Verizon is so scant on details he didn’t model any contribution or cost into the deal.

“We expect very limited contribution this year with the potential for losses early in the venture,” he wrote. “We are reluctant to model any contribution … until we have more details. There are many issues that must be resolved in the near term, and we think that the path to $72 may not be straight up. Accordingly, we think it is prudent to remove Coinstar from the Wedbush Securities Best Ideas List at this time.”

Separately, Eric Wold, analyst with B. Riley & Co. in Los Angeles, has questioned the necessity of a digital initiative, given Redbox’s market dominance in kiosk rentals — a market he believes shows no signs of slowing. Wold is less concerned about the workaround program. He also says accelerated Blockbuster store closures could generate as much as $100 million in annual revenue for Redbox, given that it operates about four kiosks within a five-minute drive of all 1,500 Blockbuster stores.

“We continue to believe these closures will provide a solid tailwind to Redbox results and expectations during 2012 and beyond,” Wold wrote in a Feb. 24 note.

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