Outerwall (OUTR) is a high growth company that operates automated retail machines. The business is divided into two segments: Redbox and Coinstar. Redbox kiosks allow consumers to rent or purchase movies, while Coinstar machines allow consumers to convert their loose coins into paper bills, to convert coins and paper bills to stored value products, and to exchange gift cards. The company is also introducing some new kiosk concepts to drive future growth.
Outerwall recently announced that it will cut 8.5% of its workforce, or 251 jobs in order to cut costs. This move is designed to reduce costs by $22 million annually. Outerwall is also discontinuing its Rubi coffee kiosks, Crisp Market food kiosks, and Star Studio photo booths. This will allow the company to focus on Redbox, Coinstar, and to implement the ecoATM and SAMPLEit concepts. The ecoATM allows the opportunity for consumers to turn in their old mobile devices for cash in a convenient kiosk. The SAMPLEit concept allows consumers to try samples of products such as skincare, cosmetics, snacks, detergents, etc. for only $1 from a kiosk. Each sample comes with a coupon for purchasing the full sized product. New revenue from these new concepts combined with the recent cost cutting measures should lead to gross margin expansion.
The stock is currently trading with a trailing PE of 11.4 and a forward PE of 12. This is significantly below the 10-year average PE of 36 for the stock. This shows that Outerwall is 69% undervalued in relation to its earnings over the long-term. Further reinforcing its undervaluation is a low of PEG of 0.66. This shows that Outerwall's earnings growth is higher than its PE, suggesting that the stock has room to run. The company also sports a low price to sales ratio of 0.80. Outerwall is priced well in terms of its balance sheet as shown by the price to book ratio of 3.1. Overall, the stock is trading at an attractive entry point for investors.
Outerwall expects to return 75% to 100% of annual cash flow to shareholders. Currently, the company has been doing this in the form of share repurchases, which increases the value of the stock. The goal is to return a total of $195 million to shareholders in 2013. Outerwall repurchased $95 million of stock in the first three quarters, so the remaining $100 million is expected to be repurchased in Q4. Another $50 million is expected to be repurchased in the first quarter of 2014. Although the company doesn't pay a dividend, management did say in the Q3 conference call that they will evaluate the merits of paying one as part of Outerwall's capital allocation plans. The $150 million shares to be repurchased in Q4 and Q1 equates to an approximate 8% of total shares. Therefore, the stock could see an approximate 8% rise over the next few months from just the buyback effect.
In addition to buybacks, Outerwall is expected to grow earnings annually at 20% for the next five years. The company has achieved a high return on equity of 22.9% for the past 12 months. This shows that Outerwall has effectively generated profits from its shareholder's money. If the expected earnings growth is achieved, it should allow the current stock price of $68.72 to more than double over the next five years.
The ecoATM kiosks represent a solid growth opportunity for the company. The total market for the ecoATM is between 5,000 and 10,000 kiosks. Outerwall expects about 600 ecoATM kiosks to be rolled out in total for 2013. The company expects 2014's rollout to be higher, although an actual number was not stated. Out of 175 million devices purchased annually, about 20% are traded in. That's a market of 35 million units annually. The ecoATM machines take tablets, iPods, MP3 players, and mobile phones, so there is plenty of opportunity for new revenue and earnings growth. The average revenue generated from an ecoATM kiosk is about 2X higher than that of the Redbox kiosks. So, this rollout should help drive Outerwall's above average expected growth.
I think that Outerwall looks like a stock that is likely to beat the market over the long-term. It has an attractive valuation with above average earnings growth. The ecoATM concept looks promising to drive future revenue/earnings growth. The share buybacks are another benefit for shareholders, which should provide a boost to the stock price. The company is protected from downside risk due to its established network of retailers that carry its kiosks. Overall, based on valuation and expected earnings growth, I see the stock price rising to at least $160 - $170 in five years.