Bull of the Day: Outerwall (OUTR) - Bull of the Day
May 09 2014 - 6:30AM
Zacks
Physically renting movies hasn't gone the way of the dodo bird
just yet. In fact, Outerwall (OUTR), recently reported
rising revenue and expanding profit margins at its Redbox segment,
which helped to drive a big first quarter earnings beat. It also
prompted management to revise its EPS guidance significantly higher
for 2014.
Analysts also revised their estimates meaningfully
higher, which sent Outerwall to a Zacks Rank #1 (Strong Buy)
stock.
Despite strong earnings momentum and solid growth
projections, shares of Outerwall trade at less than 10x forward
earnings and sport a double-digit free cash flow yield.
You probably know Outerwall best by its two primary
segments: Redbox and Coinstar. The Redbox segment consists of more
than 44,000 self-service kiosks where consumers can rent or
purchase movies and video games. Coinstar consists of 21,000
self-service coin-counting kiosks where consumers can convert their
coins to cash or stored value products.
The company also has a 'New Ventures' business
segment, which seeks to "identify, evaluate, build or acquire
and develop innovative new self-service concepts in the automated
retail space", according to the company.
First Quarter Results
Outerwall reported better-than-expected first
quarter results on May 1. Adjusted EPS came in at $1.27, beating
the Zacks Consensus Estimate of $0.92. It was a 13% increase over
the same quarter last year.
Total revenue rose 5% year-over-year to $600.4
million, well ahead of the consensus of $585.0 million. Revenue
from its Redbox segment rose 2% to $515.7 million as same-store
sales increased 1.0% (compared with an 11.8% decline in the same
quarter last year). Coinstar saw top-line growth of 5%, driven by a
3.1% increase in same-store sales. New Ventures increased revenue
from just $4,000 to $16.0 million over the same period due in large
part to an acquisition.
Operating income increased 4% as the total
operating margin declined slightly to 9.8% of total revenue.
However, this was driven in large part by a $7.4 million segment
operating loss (excluding depreciation and amortization) in its New
Ventures segment. The segment operating margin at Redbox actually
expanded from 18.1% to 20.0% of revenue. And Coinstar saw its
operating margin expand from 28.5% to 33.1%.
Operating cash flow surged 129% year-over-year to
$94.3 million. This was boosted in part by a $24.0 million cash tax
refund in January, however. The company also spent $421 million in
the quarter buying back 6.0 million shares of its stock. It was
authorized to repurchase up to an additional $282 million as of
March 31, 2014.
Estimates Rising
Following better than expected Q1 results,
management raised its earnings guidance for the full year. The
company now expects adjusted earnings between $6.68 and $7.18 per
share on revenue of $2.378-$2.488 billion. Previous guidance called
for EPS of $5.16-$5.76 and revenue of $2.358-$2.498 million.
This prompted analysts to revise their earnings
estimates significantly higher for both 2014 and 2015, sending the
stock to a Zacks Rank #1 (Strong Buy) stock.
The 2014 Zacks Consensus Estimate is now $6.86,
which is within guidance. This corresponds with 16% EPS growth over
2013. The 2015 consensus is currently $7.86, which equates to 15%
growth.
Management also expects free cash flow between $200
million and $240 million in 2014 with average diluted shares
outstanding between 20.4 and 20.5 million. That equates to free
cash flow per share of $9.76 - $11.76.
Attractive Valuation
Shares of Outerwall initially jumped following the
Q1 report on May 1 but have essentially given back all of their
gains since then. Given the sharp rise in consensus estimates and
strong free cash flow projections, shares of Outerwall look very
reasonably priced.
The 12-month forward P/E is just 9.8x, a little
more than half of its 10-year median of 18.6. And based on
management's projections for free cash flow this year, Outerwall
sports a free cash flow yield of 14.4%-17.3%.
The Bottom Line
With rising earnings estimates, solid growth
projections and very reasonable valuation, Outerwall offers
investors attractive upside potential.
Todd Bunton, CFA is the Growth & Income
Stock Strategist for Zacks Investment Research and Editor of the
Income Plus Investor service.
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