Wednesday, November 29, 2006

Calls of Note Part 2

- Thomas Weisel Partners notes that with Coinstar (NASDAQ:CSTR) up sharply, they revisited the story to see if the move was justified.

Coinstar is coming out of a period of heavy investment and appears poised for an earnings breakout. Firm's analysis suggests a two- to three-year earnings growth rate in excess of 20% if opportunities unfold as expected and they get to run-rate EPS estimate of better than $1.45 in the 2008-2009 time frame. However, their initial 2007 estimates failed to encompass management's strategy to return a portion of growth to retail partners.

Although 2007E revenue of $615mn is intact, the firm is scaling back EBITDA from $138mn to $126mn and EPS from $1.26 to $0.99. Management typically shares half of the upside it generates with retail partners and TWP had not initially factored that into their model.

With the stock up 41% since August 1, versus a gain for the Nasdaq of 16%, investors appear to have taken notice of the potential earnings breakout. If one assumes that everything unfolds as expected, Coinstar should reach EBITDA of $160mn sometime in 2009. Assuming a multiple of 8.5x, one gets to a value for the stock of $44 per share. If we discount that back at a required rate of return of 15%, one gets to a current fair value of $32 per share. They like the growth story, but would prefer an entry point below $32 per share. Maintains Mkt Weight.

Notablecalls: The stock has had quite a run and I would not be surprised to see it pull back some more over the next couple of days. Not a high conviction call.

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