An Outerwall Turnaround Would Be Unprecedented In The History Of Digital Media

Pacific Crest’s Andy Hargreaves maintained an Underweight rating for Outerwall Inc OUTR, saying that he did not recommend investing in the shares even though the company may explore options to limit downside.

Hargreaves believes that a stabilization in rental volume declines at Redbox is essential to generate adequate cumulative cash flows to drive upside to equity value. He added, “We view this as unlikely, as it would be unprecedented in the history of physical media.”

Activist investor Engaged Capital has suggested Outerwall’s management a plan to increase its share price. The plan recommends terminating all growth investments, manage Redbox and Coinstar for cash, sell or shut down ecoATM, reduce its debt, halt its share repurchase program and initiate a large dividend.

Hargreaves believes that Oiterwall’s buyback destroys capital and endangers its long-term equity value by raising the odds of bankruptcy in case of a faster than anticipated decline in the company’s cash flows. The Pacific Crest report noted, “Reducing the buyback in favor of paying down debt would reduce the odds of the worst-case scenario and is, therefore, highly appropriate, in our view.”

While Engaged Capital suggests the “potential for a significant stock appreciation based on the stock trading at a dividend yield in line with those seen throughout the S&P55,” the assumption of a sustainable dividend is unlikely, Hargreaves stated.