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.
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.
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.
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