Redbox Rentals Crash; Piper Jaffray Ditches Overweight Rating On Outerwall

• The share price of Outerwall Inc OUTR has declined 53 percent over the past six months, hitting a low of $30.21 on January 15.
• Piper Jaffray’s Michael J. Olson has downgraded the rating on the company from Overweight to Neutral, while lowering the price target from $57 to $32.
• The company reported its Q4 results above its previously lowered guidance, with the 2016 guidance significantly below consensus.

Analyst Michael Olson mentioned that the Outerwall reported its Q4 EPS at $1.43 on revenue of $527.2 million, ahead of the lowered guidance and the consensus. However, the EPS guidance of $5.00-$6.30 for 2016 was meaningfully below the consensus of $7.14.

Outerwall’s 1Q16 title slate suggest a 16 percent year-on-year increase in box office revenue. However, Olson estimates a 25.9 percent decline in rentals/kiosk in 1Q16, with a 17 percent decline for CY16.

“Redbox faces secular headwinds, and while we do not expect a "fall off a cliff" scenario, we believe the trend is accelerating and will continue to drive y/y revenue and EPS decline,” Olson stated, while adding, “Given lack of visibility on the Redbox content slate and pace of secular decline, the company is no longer providing revenue guidance.”

There could also be upside to the 2016 EPS, driven by continued share buybacks that are not included in the guidance range, although the increasing secular decline in DVD rental kiosks could also lead to potential downside risk.

Outerwall expects its free cash flow to decline significantly, year-on-year from $250 million in 2015 to a mid-point of $165 million in 2016.

The company expects to return 75-100 percent of its free cash flow to shareholders in 2016, which Olson believes is not fully reflected in either the guidance or the estimates.