Why I Am Buying Outerwall

I was kicking myself last year for not buying Outerwall (OUTR, Financial) after Mr. Market began a panic-sale. My order missed by a few cents, and the stock subsequently soared to new heights. But now that the price has come back down to earth, I'm getting a second chance. I have begun to nibble on the company's shares, hoping for a repeat of last year's rise.

Outerwall operates Redbox (automated kiosks with DVD rentals) and Coinstar (automated kiosks providing cash back for your coins...less a fee of course!) among other sophisticated machines that operate on the "outer wall" of high-traffic areas. Though the shares haven't quite fallen to the same level that they did last year when I just missed them, I believe the company is worth more now than it was then. The company has about 25% fewer shares now than it did last year (Outerwall is a frequent member of this cannibal list) while revenue and profit is also higher.

I'm also a fan of management. They are continually experimenting with new potential sources of growth, but don't waste too much capital trying to make concepts work that aren't working out; they recently shut down a few new concepts. At the same time, they have found one new concept in which they are confident: they are scaling up an automated kiosk concept that allows one to return one's old mobile phone for cash.

If this or some other innovation leads to profitable growth, great. If not, no big deal: the company trades a EV/OCF multiple of just 6. If there is a lot of capex for some reason, it's likely because a concept is profitable and is therefore being scaled out, so high future capex is not necessarily a bad thing.

One risk here though is the company's debt load. To finance all these buybacks, a sizable debt load was taken on. The company's cash flow has remained steady, which should allow for carrying this debt. But should the company falter, the leverage employed will hurt shareholders on the way down.