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Cook`s Kitchen

This is either a big opportunity, or I am as blind as a Netflix (NFLX - Analyst Report) investor. What I am talking about is the 13% drop in Coinstar (CSTR) shares in the after-hours session following the company's solid third quarter earnings report.

What was wild about this drop to $46 was that the stock already had a wild ride during the regular session, trading up to $57 and closing around $53 on 5.3 million shares, nearly five times the average.

Then, on the initial euphoria of the record company revenue and profits, shares surged all the way up to $58 in after-hours! But as investors actually read the press release and saw that the company plans to raise prices on Redbox DVD rentals to $1.20, the plummet began. Nearly 1.8 million shares changed hands, mostly between $46 and $48.

Not Another NFLX!

Investors are skittish about anybody in the flick rental business raising prices after Netflix seemed to find just about every way to screw things up lately. But this is a 20% hike in rentals that should have been expected -- and welcomed.

Expected because they haven't raised prices in eight years and because we know that merchants are about to get hit with higher "interchange" fees on credit/debit card processing for small transactions like this. And welcomed because $1 is still ridiculously cheap for renting movies in such a consumer-friendly way.

I wrote about this appeal of the Redbox way of business earlier this week when I recommended the stock. Check out "Watching Movies in Bed" for my rationale, especially after Netflix annoyed enough of its customers in the past few months for us to surely expect increased action at the Redbox.

Beating Q3, Guiding 2012 Higher, Q4 Lower

But despite an upside earnings surprise ($1.18 vs $0.89) and a boost to next year's outlook, the company did drop a little bomb in this report by saying they are only going to make between 57 and 57 cents EPS in the fourth quarter vs. consensus expectations of 77 cents.

This is probably the fly in the ointment here because if the price increase takes effect Monday October 31, then we are hearing a double whammy of new info that while they should expect increased revenue, they are going to profit less. That's scary Halloween news.

That's just my initial take reading the press release. There could be other items we will learn from the conference call.

Growth Story Not a Blackbox

Pardon my play on words, but I think that it should be plain, simple, and transparent to see this company continues to grow profits. We learned nothing new that would detract from that story. There is nothing mysterious about why more people will continue to rent movies this way and not mind paying a harmless $1.20 with the swipe of a card.

In my article from earlier in the week, two areas of profits I forgot to mention were late fees and gift cards. I can tell you that Coinstar makes coin off the late fees for DVDs from my household. Instead of paying about 3 bucks on average for our rentals, now will pay $3.60. Any questions?

What I don't know is if they are doing gift cards yet. If not, they should be. Great stocking stuffers they should sell right out of the machine. Oh and one last point about the price hike: I asked a fairly frugal family member (my wife) what she would pay if they raised the price. She said $2!

Innovation is About Knowing What Business You Are In

And speaking of machines that give you things when you put money in them, they've got ideas too, as this mysteriously close-to-the-vest quote implies: "Our New Ventures segment is moving forward with our innovative automated retail concepts."

Right on! They know they are in the consumer engagement business. I'm asking, "What can't you sell out of a kiosk?" People love simplicity, convenience... and pressing cool buttons that give them candy, DVDs, and other fun things.

Putting my money where my mouth is, I bought 500 shares of CSTR at $46.50 in the after-hours sea of red. I think the Redbox wins this war, even if they lose the battle this week.

Kevin Cook is a Senior Stock Strategist with Zacks.com

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