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From SinLetter

If you have ever had to convert your jar of change into crisp dollar notes, you are probably familiar with Coinstar (CSTR) kiosks found in grocery stores like Albertsons. The fee Coinstar charges to count your change is 8.9 cents per dollar or in other words 8.9%, a steep fee that translates into high profits for the company and shareholders. In fact recent investors in Coinstar are probably a happy lot, watching their investment appreciate a whopping 54% over the last four months and a little over 35% over the last year. The reason behind this sudden euphoria for a business as mundane as counting coins?

In addition to grocery stores, the company is now targeting financial institutions with a new line of smaller and quieter coin-counting kiosks that allow banks and credit unions decide the fee they would like to charge their customers for counting coins. Coinstar is also diversifying its revenue stream by bringing "Disney Kiddie Rides" to store fronts and has a stake in the DVD rental kiosk company redbox.

With so many new developments at Coinstar, I started looking into the company as a potential candidate for the December edition of SINLetter. However a closer look under the hood left me with the feeling that I would not even want to mention Coinstar in my Stocks That Almost Made the Cut blog entry for December. The company appears to be grossly overvalued at these levels.

When the company released second quarter results in July, earnings of 18 cents a share handily beat analyst estimates and revenue came in at $130 million, an increase of 18.67% year-over-year. This sparked off the recent four-month rally in Coinstar leaving the company sporting a lofty current P/E of 49.06 and a forward P/E of 36.68. The interesting part about second quarter results is that earnings were actually down 14% year-over-year even before including one-time charges. The story was similar when Coinstar reported third quarter results on November 2nd. While revenue increased 18% to $140 million, income fell 22% to $5.29 million.

The balance sheet also failed to inspire me with over $200 million in Goodwill for a company with a market cap of just $933 million. Coinstar does have a sizeable cash position of $181 million (including investments) but also happens to hold over $200 million in debt.

Is it possible that I am overlooking the potential from the new lines of business and the DVD rental kiosks by redbox? The prepaid phone card business that Coinstar has diversified into is highly competitive and sports very low margins. As for redbox, other DVD kiosk companies like DVDPlay already have a strong presence in grocery stores like Safeway (SWY) and even Microsoft has entered the highly fragmented movie rental industry by offering movie downloads on its XBOX 360 gaming console. Moreover the collection at these kiosks is highly limited and if I want to watch the British television series Foyle’s War or the movie The Motorcycle Diaries, I am out of luck.

While I would not go so far as to short this cash flow positive company, I certainly would not want to start a long position and may even consider the $30 Jan 2008 naked LEAP puts (LUDMF.X) for my personal portfolio and the SINLetter Model Portfolio.

As an interesting side note, given the rise in commodity prices in recent years and the drop in the value of the dollar, certain coins such as pennies and nickels are worth more for their metal content than their face value. According to Wikipedia, "copper one-cent pieces (those dated prior to 1982 and some 1982-dated coins) now contain about two cents’ worth of copper". How is that for a 100% return on investment?

http://www.sinletter.com/default.aspx

Stocks:  (AAPL)(MSFT)(SNDK)(RNWK)

One of the things that investors often shy away from in a company is when it has large, well-financed competitors. Another is a company that has an extraordinarily high share in a market where competitions is heating up.

Apple is in both categories.

The company’s run on the back of the iPod and iTunes has certainly be fantastic. The stock has gone from $50 in July to almost $89 recently. Rumors that the company will come out with an iPhone have fueled some of the recent gain. Going back even further, Apple’s stock was under $7 in April 2003.

Apple bulls like to point out that the iPod has by far the largest share in the portable media player market and that consumers will not want to shift their music play lists to another platform. Well said and well reasoned. But, the press has begun to point out that NetScape, WordPerfect, and Novell NetWare had similar share advantages. Microsoft has vowed to spend hundreds of millions of dollars on its competing Zune player. Whether they will be successful is open to question, but defending its turf will certainly cost Apple something.  Other firms like Sandisk and RealNetworks would also like a piece of the iTunes/iPod market. While they are not as big as Microsoft, Sandisk does hold second place in the MP3 player market and Real has been distributing music over the internet for more than a decade and has hundreds of millions of players on PCs.

The music industry, Apple’s largest content provider, feels that the company has "screwed" it. The iPod is often used for illegal playing of ripped CDs, and the music companies would like varialble pricing based on the popularity of content. Deals with Microsoft and Sandisk may give the music guys more of what they want.

The Mac has also done well recently. Apple now has 6.1% of the US market and could pass Gateway in share soon. Of course, the Mac is back on the radar of PC companies like Sony, Dell, HP and Lenovo/IBM. Mac sales may continue to increase, but that may only come if Apple is willing to drop price to keep its share rising.

Wall St. can take nothing away from Jobs & Co. Few tech firms have been able to match them for innovations and product sales. But, Apple is starting to draw flies.

Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.

Stocks:  (GOOG)(MSFT)

Google is an easy tarket in the world of overvalued securites. No matter how well it has done, and its has done extraordinarily well, it is still a one trick pony. The slightest stumble in its text ad driven model will cut its valuation in an instant.

Google’s stock is up from it IPO price of $85 to over $500. In a bit over two years.

Google has several problems, but the press tends to shy away from them. Google is the market’s darling.

One of Google’s most pressing issues is that all of its diversification outside its core search business has done almost nothing to bring in new revenue. Microsoft has recently made the case that companies are not likely to want Google’s new spreadsheet and word processing applications. They are simply not robust enought. Google’s entry into the only financial information business has been a bust. Google Finance is not even listed among the top 20 financial news destinations in studies by Comscore and Nielsen/NetRatings.

Google Earth and products like its photo storage and sharing business rank wll behind other companies like Photobucket. And, the jury will be out for some time on whether the company’s purchase of YouTube makes sense. While the acquisition will help Google keep first place in the online video business, it is not clear that advertisers will embrace the model. And, video content owners like the TV and film industries are upset that YouTube users post valuable programming at the site. Universal Music has already said that YouTube owes it millions of dollars for posts of its content.

Content may be Google’s biggest challenge. Video is not the only issue. A number of print companies feel that Google may violate the "fair use" provision of the law in its aggregation and linking to news content. One of the largest news agencies in Europe has sued Google over the matter, and that may be the tip of the iceberg.

While it is unclear whether Google will win the battles with content owners or make some peace with them and it is also not certain that Google can makes money with a number of its new software applications, the high stock price is a big risk.

Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.

The road is never crowded on the extra mile. GM is finding out that it is getting lonely being the one US car company that the markets believe has a chance at a turnaround. Its stock is up sharply this year from a low of $18.33 to just below $33.

But, GM management is now publicly playing down expectations that its attempt to cut $9 billion is not as easy as some would have hoped.

A great deal of the concern about the GM attempt to get itself out of harm’s way is that the UAW negotiations with bankrupt parts company Delphi are still in progress. And, it they do not work out, the big union and Delphi have some legal recourse to back to GM on labor costs. Delphi was once a division of GM. Talks between the parts company and the union are currently not active.

And, of course, there is the upcoming negotiation between GM itself and the UAW. Those being this summer.

Perhaps tempering expectations is a good idea.

Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.

For the first time in four years, Intel has taken market share from AMD in the server chip market. It happened in the third quarter of this year, according to research firm IDC. As AMD’s share of the notebook market increased, it continued to give Intel fits in that arena.

But, Intel’s Xeon 5100 server processor have been a hit.

So much for AMD’s boasts that it will take 40% of the server market in the next couple of years.

Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.

Stocks: (CAT)(MSFT)(DELL)(S)(IBM)(SUNW)(HPQ)(NOVL)

According to Reuters, US investor Samuel Hyman has take an 8.8% position in the London Stock Exchange which the Nasdaq is trying to take over.

Reuters writes that Caterpillar believes that its sales in China will quadruple as a percent of its overall revenue by 2010.

Reuters reports that Microsoft says that its Office product is unlikely to be replaced by Google’s spreadsheet and word processing applications, especially among corporate buyers.

The WSJ writes that some Delta bond holders have begun to set up a group to support the US Air bid ot take over the bankrupt airline.

The WSJ reports that Dell’s profits rose 12% from a year earliers and its shares rallied over 8% after hours.

The WSJ also reports that Alcoa announced a restructuring plan that would close a plant and cut 10% of its workforce.

The WSJ also writes that the surge in takeovers is causing rumors that several companies may be taken private. These include Spint, Hilton and several of the large home building companies.

The WSJ also reports that IBM and Sun set the pace for growth in server sales in the third quarter. IBM, the No. 1 supplier of servers with over one-third of the market grew over 6%. Sun, the No. 4 supplier grew 24% according to Gartner. No. 2 supplier HP saw its sales drop 6%. No. 3 supplier Dell grew server revenue 10%. The figures also showed that Intel grew server chip share against AMD for the first time in four years.

The New York Times reports that the Microsoft link-up with Linux supplier Novell is already causing disputes and Linux licensing authorities raise concerns over the IP patent rights between Microsoft and Linux.

The New York Times also writes that the Pentagon has contracted to buy $500 million in new supercomuters from Cray and IBM.

Douglas A. McIntyre

From 13D Tracker

In an amended 13D filing on The Pep Boys (NYSE: PBY), Pirate Capital disclosed an 11.7% stake (6.61 million shares) in the company as of Nov 20th. This is up slightly from the 11.3% stake (6.36 million shares), the firm disclosed in a filing this morning. A quarterly 13F filing showed Pirate owned 5.62 million shares as of September 30th.

http://www.13dtracker.blogspot.com/