Putting Loose Change Out Of Its Misery, One Jar At A Time, With CSTR

Last summer, after amassing a jar full of quarters, dimes, pennies and nickels I wondered how I might be able to convert them into dollar bills. That is when I came across Coinstar Inc – CSTR.

How?

CSTR makes money by providing a range of services tailored to the individual consumer. These services consist of;

• Coin-counting machines,
• Electronic payment services, and
• Entertainment services.

These products and services operate on a self-service model and;

• CSTR’s 12,800 coin-counting machines have helped customers count more than $13 Billion worth of coins since the company’s inception in the early 1990’s.
• The company operates 19,300 point-of-sale terminals, and 360 e-payment kiosks.
• CSTR also operates 320,000 entertainment services machines.

Where?

CSTR’s products and services exploit retailer’s store-front space. The company does business in the US, Mexico, Canada and the UK.

Why?

CSTR’s retail partners earn a portion of the fees that the company charges its customers. This means that valuable real estate space which would otherwise be under-utilized, becomes another revenue generator for organizations that enter partnership arrangements with CTSR. In addition;

• The company has struck partnership agreements with more than 100 retail outlets.[i]
• The company has unveiled a new service that enables consumers directly deposit coins into individual checking accounts.[ii]
• CSTR continues to attract new partners for its Coin to Card™ program, most recently adding Circuit City Stores, Inc. to a list that includes iTunes, Amazon.com, Borders, Hollywood Video, Linens ‘n’ Things, Pier 1 Imports, Starbucks, Virgin Digital, and Eddie Bauer.[iii]
• CSTR has entered a strategic partnership with the market leader in stored value card solutions in the UK. This agreement enhances the company’s UK Gift Card Mall program, and provides retailers with another distribution channel. It also offer’s consumers more options for purchasing gift cards without necessarily visiting the issuing merchant’s store.[iv]

Future Prospects

CSTR’s future prospects look excellent:

• Obvious opportunity lies in geographic expansion, particularly in Western Europe, for the short term, and possibly in promising emerging markets in the long term.
• The company’s partnership with McDonald’s Ventures, LLC in Redbox Automated Retail, LLC – a DVD kiosk operation, has yielded brilliant results. Redbox has experienced growth of more than 100% in kiosks that have been in operation for more than one year, also Walmart Stores and Walgreens have begun testing Redbox kiosks in a number of locations. 2007 could see significant growth in the number of Redbox kiosks in operation – even as Blockbuster continues to battle declining sales.[v]
• CSTR has taken steps to make it difficult for direct competitors to wade into its turf without expending significant resources – the partnership agreements it has entered offer immense protection, also the company holds more than 50 patents that govern various aspects of its business.

Threats

Factors that may threaten CSTR’s growth include:

• An economic slowdown that prompts consumers to become more frugal, thus stunting business in the company’s entertainment services.
• Security glitches in its electronic payment services could lead to a loss of confidence among customers. I would peg this as a low risk.
• As growth accelerates, there will be more need for costly investments in technology, it is not clear if demand for CSTR’s services will grow quickly enough to cover such investments.

The company’s management has indicated that it will focus on[vi]

• International expansion,
• Product and service expansions,
• Expanding the number of units in operation,
• Stronger customer relations, and
• Growth through acquisitions.

Presently, CSTR does not have any significant direct competitors. That should bode well for investors that do not mind exchanging coins for CSTR’s shares.

December 12, 2006