A Big Investor Is Bailing Out of Outerwall, Should You Be?

Barry Rosenstein's Jana Partners has reduced its ownership stake in Outerwall (NASDAQ: OUTR  ) from 8.4% of the shares outstanding to 4.9%. Its stake was once as high as 13.5%. Shares of Outerwall have soared (up over 30%) since Jana Partners first announced its purchase.

Jana Partners' push for change
At the urging of Jana Partners, the company announced a major restructuring plan in December. It announced a change in the leadership of Redbox, which is in the video-rental kiosk business, and a reduction in the workforce as it implements its restructuring plan. 

The activist investor, Jana Partners, acquired 13.5% of Outerwall in October of last year. Initially, Jana Partners had been pushing for a sale of assets or the company itself. The change in leadership involves the departure of Redbox President Anne Saunders, and leadership responsibilities for the business will rest with CEO J. Scott Di Valerio and his management team.

Outerwall also announced the discontinuation of three businesses, namely the coffee kiosk Rubi, the prepared-food kiosk Crisp Market, and the interactive photo-booth Star Studio. It aims to cut costs by approximately $22 million next year by shrinking its workforce. The company has already seen an 8.5% workforce reduction. 

Outerwall gains strength
Outerwall's revenue for the fourth quarter came in below the estimates, but it still grew by more than 5% year-over-year. Outerwall's earnings per share came in at $1.68 per share to beat the estimates after it earned $1.01 per share in the year-ago quarter.

Its Redbox revenue only grew 1.7%, but Coinstar revenue grew 8.4% year-over-year. The good news was that its new ventures segment saw its revenue rise to $16.6 million from $293,000 in the previous year, mainly driven by the company's acquisition of ecoATM.

The future is beyond movies and coins
With the likes of Netflix (NASDAQ: NFLX  ) and Amazon.com getting more aggressive in the content-streaming sector, Outerwall is turning to other areas of the market for growth. Its future revenue growth will likely come from customers who are trading in used mobile devices and unused gift cards.

Netflix continues to grow at an impressive rate. Just last quarter, Netflix added some 4 million subscribers, increasing its global subscriber base to 48 million. It also has a large selection of over 40,000 movies and TV shows, and is developing its own content. New content, such as House of Cards, has resulted in subscriber gains as well. However, while Netflix has a rich valuation with a P/E of 185, Outerwall trades at a P/E of 11.

Finding growth in mobile and gift cards
Outerwall's future relies on finding faster avenues of growth. This begins with its newest acquisition, ecoATM, which runs kiosks where customers can trade in their used smartphones and tablets in return for cash. Other new initiatives include Coinstar Exchange, which operates kiosks where people can exchange unused gift cards at retailers for cash. Then there are SampleIt kiosks, which sell samples of products such as snacks and cosmetics for $1 apiece and offer coupons for the regular products. The company wants to generate between 9% and 12% of its revenue from its new initiatives by 2015--these products only generated 3% of its revenue in the fourth quarter. 

The new initiatives are exciting growth opportunities for Outerwall. The market for used mobile device trade-ins was worth $1.4 billion last year, but expectations call for it to grow to more than $7 billion by 2018. This comes as the product refresh cycle is shortening. The likes of Apple are refreshing their phones every six months or so. The turnover in phones is only increasing, and as a result more mobile devices need to be recycled. In its fiscal second quarter, Apple sold 43.7 million iPhones, dwarfing estimates which called for it to sell 37.7 million. Meanwhile, iPad sales came in at 16.35 million. Despite the number of devices that Apple continues to sell, it trades at a P/E of 14. However, this still exceeds the valuation of Outerwall. 

Bottom line
Jana Partners looks like it has set up the company up for future growth. Outerwall is building a strong portfolio of businesses that leverage shoppers' desire for convenience. Investors who are interested in gaining exposure to a unique business that's tapping various markets should take a look at Outerwall.

Will this stock be your next multi-bagger?
Give me five minutes and I'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks 1 stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.


Read/Post Comments (0) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2940469, ~/Articles/ArticleHandler.aspx, 10/25/2014 2:58:35 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement