Outlook: Outerwall’s Guidance Remains Clouded

Source: http://www.flickr.com/photos/sararobertson/

Source: http://www.flickr.com/photos/sararobertson/

Outerwall (NASDAQ:OUTR) Q4:13 revenues results were in line with consensus, but EPS beat our above-consensus expectations. Revenue was $594 million, compared with our estimate of $608 million, the consensus of $595 million. EPS was $1.68 (ex. a $0.13/share net loss), versus our estimate of $1.33 and consensus of $1.22

The share repurchase should position Outerwall for significant earnings accretion in 2014 and is the big news from Outerwall today. We think that the buyback will result in a reduction of diluted shares outstanding to around 21 million from last year’s 28 million, meaning that if there are no further buybacks in 2014, OUTR’s share count would drop by over 20 percent. We expect the company to generate over $200 million in free cash flow in FY:14 and spend $150 million repurchasing stock.

The sharp reduction in New Ventures should allow the company to focus on its core business, and allow it to harvest a greater amount of cash flow than in the past. We expect Outerwall to invest $35 million in ecoATM annually (1,000 installations), and believe that other capex could total $125 million, leaving Outerwall in excess of $200 million in free cash flow.

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

The company provided initial FY:14 guidance for revenue of $2.358 – 2.498 billion and EPS of $5.16 – 5.76. The company provided initial Q1:14 guidance for revenue of $570 – 600 million and EPS of $0.77 – 0.97. We are decreasing our FY:14 estimate for revenue slightly to $2.53 billion from $2.54 billion to reflect lower Q1 expectations, but increasing our EPS estimate to $7.34 from $6.75 to reflect an increased and accelerated share buyback program.

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. This is 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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