Roth Capital Starts Outerwall At Buy With $80 Price Target

• Outerwall Inc OUTR shares are down 17 percent year-to-date, having plunged from a high of $84.45 on July 22.
• Roth Capital Partners’ Darren Aftahi initiated coverage of the company with a Buy rating and a price target of $30.
• Outerwall’s Redbox and Coinstar businesses are predictable and offer a healthy FCF stream, Aftahi said.

Analyst Darren Aftahi mentioned that Outerwall’s Redbox and Coinstar businesses “offer investors a fairly predictable and robust free cash flow (FCF) stream.” He added that both these businesses appear to have solid pricing power longer-term, citing their “incumbent market positions.”

Redbox’s market share is estimated at about 58 percent market share in FY15, while Coinstar is the leading kiosk platform in the country for coin counting and gift card exchange. Both Redbox and Coinstar have healthy EBITDA margins, in the low 20 percent range and high 30 percent, respectively.

Moreover, these margins no longer require new install capex, “providing investors fairly predictable and substantial FCF yields," Aftahi pointed out.

In the report Roth Capital Partners noted, “Redbox pricing remains approximately one-third of its digital peers for new release movies…Given this dynamic, we believe Redbox has flexibility to raise prices in the future (possibly as early as 2017), which should further bolster margins.”

The competitive landscape for ecoATM is much more challenging, with the launch of upgrade and leasing smartphone programs. Aftahi added, however, that this does offer shareholders “optionality for topline growth.”

The acquisition of Gazelle eliminates a digital competitor from the market, and “makes ecoATM, in our view, the dominant brand in the device trade-in for cash business,” the analyst stated.

Aftahi believes that Outerwall offers an attractive FCF yield with a strong capital allocation policy, and its shares are “highly attractive.” The company has used most of its FCF for share repurchases and dividends, in addition to deleveraging the balance sheet.