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Jonathan Poland
Jonathan Poland
Articles (213)  | Author's Website |

Redbox Owner Outerwall Is a Falling Knife

With most media being consumed digitally, Outerwall is between a rock and hard place

December 17, 2015 | About:

If you don't know already, Outerwall Inc. (NASDAQ:OUTR) is a provider of kiosk deliverables offering products and services to consumers and helping drive incremental retail traffic and revenue for retailers. It owns Redbox and Coinstar. Redbox rents movies and video games through its approximately 43,680 Redbox kiosks. Coinstar kiosks are available in approximately 20,250 locations, allowing customers to convert their coin to cash, convert coins and paper bills to stored value products, and exchange gift cards for cash.

Financial highlights

  • 2.88% dividend yield.
  • 9.66x price to earnings.

Last 10 years

  • 400% growth in revenue.
  • 222% growth in net income.
  • 20% reduction in shares outstanding.

Based on these numbers summarizing the company's last decade, you might be excited to look deeper into owning the stock. Yet, in 2015, the shorts have been winning with Outerwall, which has plunged 46% this year, 30% in the last 10 days alone after cutting its revenue forecasts by more than $400 million. I think it’s only going to get worse.

From a pure numbers standpoint, the company has been moving rapidly into higher and higher valuations. Ten years ago, it was generating $22 million off of $460 million in sales. Last year, the company did $2.27 billion in sales, producing $71 million in net profit. The stock over this time (until last month) had risen from $23 per share up to $80. Not bad for growth, and I’m sure you can agree.

The problem lies in the business model. Redbox, the company’s top service, could be in permanent decline and it may only be a matter of time until the company’s cash flow will not be able to support the dividend.

Interestingly enough, transactions per Redbox kiosks have declined by 15% in the last five years, and while it’s still the cheapest option for the latest DVD releases, it seems that since the economy has recovered, so has the need for convenience over cost. Of course, this could also just be a product of too many other sources for media consumption as well. With this service comprising more than 75% of Outerwall’s business, it’s hard to see a future of growth for the company.

If they were doing the right things financially, it might have made sense to get involved at this price point, but the company has taken on too much debt (close to $900 million) for the level of earnings it currently enjoys. The enjoyment will end sooner rather than later unless management can get a new brand into the business - maybe one outside of the kiosk model.

Everything is moving online and digital, and while I personally used to rent at Redbox every week just three years ago, when I seek entertainment now, it’s through Netflix (NASDAQ:NFLX), Amazon (NASDAQ:AMZN), and the occasional Xfinity onDemand purchase.

The fair value estimate for this business is in the $10 range. At the same time, it’s a stock that should be put into the “too hard” file instead of shorting it. Maybe they'll get it right in the future, but it's not looking good at the moment.

Disclosure: I have no positions in the stock.

About the author:

Jonathan Poland
Thanks for reading! I'm a former money manager and financial publisher that has helped investors produce market beating results since 2001. Today, I turn 40,000 hours of work analyzing and forecasting the world's leading investments into models for better business development.

Visit Jonathan Poland's Website


Rating: 2.0/5 (2 votes)

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Comments

Jonathan Poland
Jonathan Poland - 1 year ago    Report SPAM

Correction: The company only cut its revenue forecasts by $40 million, not $400 million.

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