March 6, 2011 in Business

Coinstar’s future uncertain as streaming gains momentum

Universal Press Syndicate

Coinstar (Nasdaq: CSTR) shares took a hit last month, after delivering ho-hum financial results and a weak outlook. The company makes money with its self-service coin-counting machines business, but its once-juicy Redbox DVD-rental kiosk model is starting to become unhinged.

You won’t see it right away. Profits from continuing operations in the fourth quarter nearly doubled while revenue climbed 31 percent. This doesn’t sound like a fading company at all, until you realize where it was and where it thought it was going.

Coinstar’s Redbox business grew by 99 percent in 2009, with consolidated revenue climbing a cheer-worthy 50 percent. The deceleration is beginning, and it’s not going to get any better in the near term.

This is a transitory technology. Digital is the future. It doesn’t matter that Coinstar’s been doubling the size of some of its kiosks, adding Blu-ray titles or video games. More than half of the content consumed by rival Netflix subscribers is streaming. Optical disc sales – Blu-ray or otherwise – stink. (Netflix is a “Motley Fool Stock Advisor” selection.)

DVDs will remain appealing for years, but streaming video seems to be taking over. Coinstar is making moves to add that capability to its arsenal, but is it too late? Unless it can reverse its trajectory, the handwriting is on the wall.

Ask the Fool

Q: What’s a “highly capitalized” company? – R.C., St. Augustine, Fla.

A: It’s one that’s asset-heavy, overloaded with unproductive assets, such as cash. Lots of cash is generally good, but if it’s just sitting around unused, that’s not ideal. In fact, if a company has nothing better to do with the money, it might as well pay it out to shareholders as a dividend, or use it to buy back (and essentially retire) some shares.

The term might also suggest that the firm’s market capitalization is too high. Market cap is the total price tag the market slaps on a company, calculated by multiplying the current share price by the total number of shares.

Q: How do I account for my shares of stock when I sell them, if they have been split 2-for-1? – H.E., Watertown, Wis.

A: Let’s say you bought 100 shares for $10 each (initial cost: $1,000) and they were trading at $16 before the split, for a total value of $1,600. You get two shares for each one you own, so after the split, you’ll own 200 shares, worth half as much ($8 each), for a total of … $1,600. See? Not much has changed, materially.

For tax purposes, though, the “cost basis” of your purchase, which was $10 pre-split, is now halved, dropping to $5. So if you sell now, your capital gain will be your $1,600 in sale proceeds (less your brokerage commission cost), minus your $1,000 purchase price (plus your commission cost). Including commission costs is legal and will reduce your taxable gain a little.

Lots of numbers get adjusted when splits happen — these include dividends per share, earnings per share, and other figures based on share count.

My dumbest investment

The dumbest thing I ever did was to sell much of my portfolio at the bottom of the market in 2008, as I feared deeper drops. I later repurchased many of the same stocks at much higher prices. I can’t believe I used to own Netflix at $26 per share. What an idiot I was. I learned that all you need to know about buy and hold is the name itself. If it’s a good company, buy it and hold it. – A.H., Denver

The Fool responds: With Netflix recently trading around $220, you did indeed lose some money. You succumbed to a common investing mistake – reacting to emotions such as fear or greed. It’s good to remember that the stock market will indeed plunge (and soar) on occasion. If you’re in stocks for the long term, as long as your companies are healthy and growing, just hang on.

Buying and holding has made many people wealthy, but it’s best to buy to hold, hoping to own a company for many years, but keeping an eye on it, too, for any signs of lasting trouble.

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