Bull of the Day: Outerwall (OUTR) - Bull of the Day
December 31 2013 - 2:26AM
Zacks
One of the most notable brand face-lifts of 2013 was when Coinstar
changed its name (and stock symbol) to
Outerwall (OUTR). At
the time, you may have wondered why they didn't just call
themselves Redbox, after their premier brand of DVD kiosks. But if
you have read anything I've written about the company in the past
few years, you know I saw something like this coming.
From my October 2011 article Coinstar Sees Red on
Price Boost, here is the rationale I gave...
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.
The Business of Convenience
Following my prescient views, in 2012 Coinstar
rolled out the Rubi Kiosk to serve Seattle’s Best Coffee. More on
this in a moment as my enthusiasm about what the company could do
with kiosk concepts of any color hasn't exactly turned into
green.
Along with the name change in 2013 came their
newest innovation, the ecoATM, which is tackling the problem of
e-waste by recycling consumers' old phones, mp3s, tablets and
more—and paying cash for most devices.
And I don't expect they are stopping the innovation
there. As the company website proclaims, "We transform empty spaces
into exciting retail solutions that make life easier and less
complicated for consumers — and more profitable for retailers.
Powered by proven technologies and practices — and a great instinct
about people — we're revolutionizing the way people shop and do
business with a growing portfolio of products and services."
The Earnings Outlook
As you can see in the 12-month EPS projection with
price below, shares have ridden the upward trajectory of actual
earnings and analyst estimates. But the path has often been bumpy
and volatile.
Outerwall became a Zacks #1 Rank again last week
after a wave of upward EPS estimate revisions hit in mid-December,
bumping the 2014 consensus 6.5% to $5.72 from $5.37 and back to
double-digit earnings growth of 13.5%. The catalyst was a corporate
restructuring which actually had to do an about-face on a few
innovations.
Here were the highlights from the December 10 press
release announcing the company's intentions:
- Plans to Exit Three New Venture Concepts
- Announces Leadership Transition at Redbox
- Implements Additional Actions Expected to Achieve $22 Million
of Annual Cost Savings
- Increases Senior Secured Credit Facility by $350 Million to
Achieve Target Net Leverage Ratio in Q1 2014
Analysts Encouraged
Among the discontinued "new venture concepts" were
Rubi, Crisp Market (vegetables in a kiosk?), and Star Studio. It
looks like innovation just hit a big speed bump.
But, following the 14th Annual California Dreamin'
Conference, which was the same day as the company revelations,
Wedbush analysts had this to say...
"We are encouraged that management continues to
demonstrate alignment with shareholders, and believe that the
restructuring has positioned Outerwall to substantially grow EPS in
2014. The company will discontinue three of its New Ventures
businesses, but continue to invest in its ecoATM business, which we
expect to be accretive to EPS in 2014.
We think Outerwall is a cash flow story and believe
that its cash flows will be relatively stable over time. We think
that with a shrinking share count and stable cash flow, Outerwall
shares will continue to appreciate over the long term."
The firm has an $82 price target on OUTR, which
reflects just over 12x their 2014 EPS estimate of $6.75, the
highest on the Street.
Other analysts were less enthusiastic with JPMorgan
maintaining its $60 price target, noting that while Redbox is
clearly the dominant player in DVD rentals, that market may be
getting close to saturation. But they also noted the potential for
the company to manage its cash flow generation in positive
ways.
I would tend to agree about the DVD saturation
argument. It's not like there is a growing segment of the
population that will soon be adopting DVD rental. In fact,
arguments could be made that "late-adopters" of the Netflix
(NFLX) model could give up the Redbox way.
Bottom line: As Outerwall makes an adjustment to
its 2013 face-lift, they get to streamline their existing cash cow
and buy themselves some time back at the innovation drawing board.
So far, Wall Street likes the adjustment, with shares making a new
52-week high at $72 after the plans were announced and now only 7%
off those highs.
If they can come up with innovations to build off
of Redbox success -- and that don't require a lot of cash burn --
they might create the next catalyst to break that $6 EPS ceiling
and keep the shares attractive above $60.
Kevin Cook is a Senior Stock Strategist for
Zacks where he runs the Follow The Money portfolio.
NETFLIX INC (NFLX): Free Stock Analysis Report
OUTERWALL INC (OUTR): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research
Outerwall Inc. (NASDAQ:OUTR)
Historical Stock Chart
From Mar 2024 to Apr 2024
Outerwall Inc. (NASDAQ:OUTR)
Historical Stock Chart
From Apr 2023 to Apr 2024