Will Outerwall Weather Rental Demand Declines?

Source: Thinkstock

Source: Thinkstock

Outerwall (NASDAQ:OUTR) will report Q1:14 (March) results after market close on Thursday, May 1, and will host a call at 2:00 p.m. PT (dial-in: 800-708-4540, passcode: 36985543, webcast: ir.outerwall.com.)

We expect Q1 results at or above the high-end of guidance from a strong Redbox release slate. Our estimates are for revenue of $605 million and EPS of $1.03 versus consensus for revenue of $587 million and EPS of $0.95, and guidance for revenue of $570 – 600 million and EPS of $0.77 – 0.97. At the high end, revenue guidance implies year-over-year growth of 4 percent despite a strong release slate (we estimate box office was up 20 percent, in-line with earlier management commentary) and the contribution of New Ventures ($16.6 million in Q4:13 versus $1.4 million in Q1:13.)

Box office strength and cost control should more than offset the negative impact on EPS from the reversal of a $7 million amortization benefit. If results had been trending below expectations, we believe management would have preannounced at its analyst event on February 26. The March DVD lineup was very strong.

We expect full-year EPS guidance to reflect the impact of the recent tender. FY:14 EPS guidance is $5.16 – 5.76, reflecting January repurchases, but not the Dutch Auction tender. In March, Outerwall repurchased 5.3 million shares, or 20.6 percent of its share count, for $371.4 million. We believe management used a 26 million basic share count when it provided full-year guidance. The drop in share count to 20.4 million represents annualized accretion of over 20 percent; current guidance is therefore understated, implying a new range that exceeds current consensus of $6.09 at the low end. We note Outerwall had an estimated $279 million remaining in its share repurchase authorization after the tender offer.

Guidance remains confusing, with many moving parts clouding the company’s profit picture. As an example, it changed its amortization of content, and has chosen to accrue some of the purchase price of ecoATM in 2014, setting up unfavorable comps to profitability last year. These constant accounting changes cloud our visibility into sustainable earnings, and could trigger share price volatility.

We are maintaining our OUTPERFORM rating and 12-month PT of $82. Our PT reflects just over 11x our 2014 EPS estimate of $7.34, a discount to its historical valuation to reflect recent rental demand declines and uneven profitability. Outerwall shares are on the Wedbush Securities Investment Committee’s Best Ideas List.

Michael Pachter is an analyst at Wedbush Securities. 

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