Coinstar Pre-announces a Huge Earnings Beat; Chanos Blushes

Coinstar (CSTR) pre-announced solid first-quarter results after the close Thursday. The owner of Redbox self-service movie rental kiosks said that it now expects consolidated revenue for its first quarter to come in over $569 million at the high end and core diluted earnings per share to come in the range of $1.36 to $1.40 per share for the period (consensus was at only $0.89 per diluted share).

Coinstar noted strong consumer demand at Redbox in the quarter, particularly during February and March. The firm also witnessed strength in turns of the following titles: Moneyball, Puss and Boots, 50/50, In Time, Abduction, and Mr. Popper’s Penguins. Specifically, Coinstar cited lower than expected card processing fees and direct operating costs at Redbox as the main reasons for the significant bottom-line outperformance. For 2012, the firm now expects consolidated revenue to be at $2.28 billion at the high end and core diluted earnings per share to be as much as $4.80.

We think such a strong pre-announcement from a controversial firm should act as a reminder to investors to be careful while shorting stocks. For example, on the same day that Coinstar pre-announced, one of the more well-known short-selling hedge fund money managers, Jim Chanos, offered his thesis on why his firm is short Coinstar’s stock on CNBC’s morning Squawk Box. Ironically, after the market closed (less than a few hours later), Coinstar was up nearly 15%.

Contrary to Chanos’ view, we strongly believe that valuation is the most important factor in investing. For one, a DCF valuation model fully captures flawed businesses models and reduced performance due to technological changes better than any other process. Only by forecasting a company's fundamentals long into the future--the core of a DCF process--can such firm-specific dynamics be fully reflected in a fundamental valuation assessment of the entity.

Plus, a strict and sufficient margin of safety (our ValueRisk™ rating) coupled with a technical and momentum assessment helps guard against any potential accounting problems (absent outright fraud, which is near impossible to detect). That’s why we only use put options to bet on the decline of stocks in the portfolio of our Best Ideas Newsletter, instead of actually borrowing a firm's shares. By using options, we limit our exposure to the premium paid, unlike Chanos--who may continue to lose money as Coinstar's price rises.

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