Tuesday, August 5, 2008


The stock beat and raised estimates for the quarter and was initially up a dollar but has since retreated about $4.

The key to the story is the Redbox DVD kiosk business. It is on a path to do almost $100 million of EBITDA and IPO at a valuation of $800 million to $1 billion. If that is the case, Coinstar's share if the business -- McDonald's (MCD) owns half -- is worth around $15 a share. If the company's other businesses are worth the debt, you are creating the coin business for around 4 times EBITDA. We think the sum of the parts value is worth close to $50.

In almost any scenario, we have hard time coming up with less than the current quote, with the IPO of Redbox as a nice catalyst to unlock value. I believe that the post-earnings decline was a combination of momentum investors who were concerned by weaker comps on the coin business (though this was driven by massive and accretive installs) and those who wanted more progress on the Redbox IPO (hard to get deals done in this tape).

In addition, Blockbuster (BBI) is getting into the business with 50 kiosks. This is not news, and Redbox has 10,000, with many of the best locations locked up and a pricing model that at one-per-night disrupts Blockbuster's pricing.

Redbox has gone from negative EBITDA to $100 million in a year and is one of the true growth stories out there. An IPO should be doable when the window opens. This company has a lot of moving parts, but there is both growth and value in its business and share count. At $31, a lot can go right.

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