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Shares of Outerwall (NASDAQ:OUTR), the parent company of Coinstar and Redbox, have risen dramatically since a strategic investment from Jana Partners. Despite this rise, shares continue to look compelling going forward with the strength of new initiatives, Redbox Instant, and the focus on returning cash to shareholders.

Jana Partners acquired a 13.5% stake in the company. At the time of its purchase, Jana said it was seeking "strategic alternatives that include selling part or all of the company."

Redbox Instant

I have written several pieces on the importance of Redbox Instant for Outerwall. The new streaming business puts Redbox in better competition with rival Netflix (NASDAQ:NFLX). The joint venture, which is 65% owned by Verizon (NYSE:VZ), tries to cater to an audience that wants streaming options and movies at the kiosk.

Recently, Outerwall announced its Redbox Instant service will now be available on Sony's (NYSE:SNE) Playstation 3. For $8 a month, gamers can now get unlimited streaming and also four DVDs at local Redbox kiosks. In the release, Redbox Instant is said to offer 7000 movies on its streaming service. The four rentals come from any of the company's 43,000+ kiosks. When I wrote about Redbox Instant in December, the company was kicking off its launch with 4600 titles. Now, the company is on its way to double the number of streaming options and make the $8 monthly fee an extreme value.

Buybacks/Dividend

Thanks in large part to the shadow of Jana Partners on it, Outerwall is boosting its share buyback program. The company recently said, "Given the needs of the business and the strength of our cash flows, we believe it is appropriate to return 75-100% of free cash flows to Outerwall shareholders, which in the near term will be in the form of share repurchases."

In the third quarter, Outerwall bought back $23.6 million worth of its own shares. Now through nine months, Outerwall has purchased $95.0 million worth of company stock. With the new plan, the company expects to buy $150 million worth of shares, with $100 million coming in the fourth quarter, and $50 million coming in quarter one of next year. At current prices in the $67 range, $150 million would retire 2.2 million shares and reduce Outerwall's share count by around 8%.

Of course by saying free cash flow given as share buybacks in the near term leads way to the debate of a dividend. Like rival Netflix, Outerwall does not offer a quarterly dividend. With Jana Partners owning a large stake, there is the possibility the company could push Outerwall to issue a dividend payment. However, the activist investor may be just as happy with share buybacks. My guess is the company will pay a quarterly dividend by the end of 2014.

Break-Up

One suggestion with Jana Partners' investment is a break-up of Outerwall's businesses. The company generates a large portion, north of 85%, of revenue from its Redbox business. The other portion of revenue comes from Coinstar and the company's New Ventures segment. Many believe Jana may push for a sale of Coinstar and could possibly push for a sale or closure of other Outerwall kiosk businesses.

I wrote about the company's push into coffee with its Rubi kiosks. Outerwall also acquired the ecoATM kiosk business and has been rapidly expanded the presence of the electronics recycler throughout the country. There are now 800 ecoATM kiosks, as reported at the end of the third quarter. With testing currently taking place in grocery channels and malls, I'm hoping ecoATM continues to be a focus for Outerwall, as I think it is a great way to capitalize on the current technology shift and ever-changing product launches from companies.

Strong Third Quarter

Outerwall recently reported stellar third quarter earnings. The company posted earnings per share of $0.97, which came in $0.09 ahead of most analysts' estimates. Quarterly revenue of $587.4 million also beat analysts' estimates by $10.1 million.

The company's quarterly revenue broke down as:

· Redbox: $491.7 million

· Coinstar: $79.6 million

· New Ventures: $16.0 million

Total Redbox rentals were up 13.1% and hit a new quarterly record with 199.5 million.

Share Valuation

Analysts on Yahoo Finance are projecting modest 5% revenue growth for both the current and next fiscal year. Earnings per share are expected to increase 3% to $4.98 for current fiscal 2013. In fiscal 2014, analysts see earnings per share jumping 6% to $5.32. With a price of $67.72 at the time of writing, Outerwall shares are trading with current and forward price to earnings ratios of 13.6 and 12.7 respectively.

Even without share buybacks, shares seem attractive under 15 times forward earnings. However, with the possibility of retiring 8% of the company, earnings per share should be up closer to 10% in the next fiscal year. My estimate would be closer to $5.48 for fiscal 2014 earnings. With a forward multiple of 15x, shares would be valued at $82.17.

Conclusion

I am curious to see what Jana Partners will do with Outerwall. The company was hurt by declining DVD rentals, but seems to have the problem fixed with streaming options, and other kiosk businesses. The promise to return so much free cash flow to shareholders should be a huge bullish sign that Outerwall is willing to play with Jana Partners. Stay tuned to see what Jana wants to change in the company, but consider investing along with Jana to be pleasantly rewarded.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in OUTR over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: 5 Reasons To Invest In Outerwall Alongside Jana Partners