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Each week, Motley Fool editors cull a top stock idea from the pitches made on CAPS, The Motley Fool's 170,000-member free investing community. Want your idea considered for this series? Make a compelling pitch on CAPS with a minimum length of 400 words. Want to follow our weekly picks? Subscribe to our RSS feed or follow us on Twitter.

CompanyCoinstar (NAS: CSTR)
Submitted By:TSIF
Member Rating:99.95
Submitted On:10/28/2011
Stock Price At Recommendation:$52.95

Coinstar Profile

Star Rating***
HeadquartersBellevue, Wash.
IndustrySpecialty Retail
Market Cap$1.44 billion
Industry PeersAmazon.com (NAS: AMZN)
NCR (NYS: NCR)
Apple (NAS: AAPL)

Sources: Capital IQ (a division of Standard & Poor's), Yahoo! Finance, and Motley Fool CAPS.

This week's pitch:

Some investors believe that Coinstar, Inc will reap the rewards of Netflix (NAS: NFLX) misfortune on the short term rentals. I previously noted that those Redbox dispensers are really popping up everywhere. Overall however, the DVD kiosk rentals is a limited business. Streaming and selection via other means will catch back up.

I believe Coinstar investors have put too high of a premium on the share price since Netflix's fall from grace. In this sentiment/environment share holders who are asking too much are the quickest to run when the company can't quite deliver what they want. Profit margins have been tight at sub 5%. P/B is 3.5. P/E "around" 20.

I don't think Coinstar is a bad business, and may have potential at the high $30's. It hit $40 four times in the last three months prior to the Netflix over upside correction.

Update after earnings: Coinstar "pulled a Netflix" with the announcement that it will raise rentals by $0.20. Not much in the scheme of life, maybe a $1 a week for a moderate user, but it's still 20% and the principle of the raise. It does demonstrate, however, that the content costs are rising and margins, despite the price increase will remain tight. Hard to say if they will lose/gain/net revenue on the price raise, I expect gain revenue slightly, but not [to] the level they need to [support] the current share price. The 11 Million shares short got away with this one this quarter and I think are safe. Growth for the quarter was weak.

Target for CAPS: Sub $44.

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At the time this article was published The Motley Fool is investors writing for investors.Dan Dzombakhas no position in any of the companies mentioned in this article. Pitches must be compelling, made in the past 30 days, and be at least 400 words.The Motley Fool owns shares of Apple.Motley Fool newsletter serviceshave recommended buying shares of Apple, Amazon.com, Netflix, and Coinstar and creating a bull call spread position in Apple. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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