Coinstar's stock on a summer thrillride as quarterly numbers confuse investors

Coinstar Inc. may have changed coin changing with its Big Green Machines, and helped to remake the DVD-rental landscape with redbox, but it faces a challenge when it seeks to make its investors happy.

The Bellevue, Wash.-based retail kiosk giant last week reported second quarter results and full year guidance after the close of trading on Thursday, July 29. The numbers caused Wall Street on Friday to sell off Coinstar (CSTR) shares, sending the stock price down about 9 percent.

However, this week the stock has rebounded to trade at around $47 a share, near where it closed last Thursday.

Stock analysts note that Coinstar stock is swimming upstream for several reasons, partly due to its product set and partly due to investor behavior.

The quarterly results were actually pretty solid, though they did not live up to many investors' expectations, said John Kraft, a vice president and senior research analyst who follows Coinstar for D.A. Davidson.

"On the surface the numbers looked good but they were disappointing compared with what people expected," Kraft said.

All that proved too confusing in the heat of the trading day, and many investors bailed. But now that the smoke has cleared, investors are returning.

"When they thought about it, they decided the news wasn't so bad," said stock analyst Lawrence Berlin of First Analysis Corp. in Chicago.

Going forward, Coinstar provided guidance on where it expects its revenues and profits to shake out. For the 2010 third quarter, Coinstar expects revenues between $370 million and $390 million, and 2010 full year revenues between $1.4 billion and $1.5 billion.

That apparently good news wasn't much comfort to Coinstar investors last week while its stock took its bumpy ride.

Coinstar's stock price also is impacted by the unusually large percentage of shares that have been sold short by investors in the belief that the price is too high. These short sellers, or shorts, don't own the shares, but sell them with the intention of buying them after the stock falls.

Berlin cites research finding that short selling accounted for 23 percent of Coinstar's available shares in July. That's huge compared with industrial giant GE with .7 percent, and investor's darling Apple with 1.5 percent.

"The short interest is real high on (Coinstar). When the results were announced, the shorts thought the stock would really drop," Berlin said.

On a day-to-day basis short interest makes Coinstar a very volatile stock, as traders get in and out of the market, says Kraft.

"It will swing widely," he said.

And for those taking the 50,000-foot view, Coinstar with kiosks, along with DVD mail-rental firm Netflix, have had a massive influence on the movie business by changing how Americans get their DVDs, says Kraft. Coinstar told analysts that redbox has an estimated 25 percent of the DVD rental business, compared with 36 percent for Netflix, 24 percent for brick-and-mortar outlets and the remainder the ever-present ‘other'.

"Kiosks and Netflix have contributed to the death of brick and mortar … and changed the dynamics of the entertainment industry," Kraft said. "We're in new territory."

In the last week investors learned that Coinstar's stock is in new territory as well.