In today’s Daily Alert Richard Segarra recommends a growth stock with strong earnings trends that is undervalued in the short-term. This smallish-cap stock sometimes exhibits high volatility (like the recent one-day dive that makes it such a good value here), so it’s only for investors with strong stomachs and good loss-management strategies.
Outerwall (OUTR)
Outerwall (OUTR) is a provider of automated retail products. The company’s core offerings in automated retail include its Redbox business, where consumers can rent or purchase movies and video games from self-service kiosks, and its Coin business, where consumers can convert their coin to cash or stored products at self-service coin counting kiosks. The company’s New Ventures business is focused on identifying, evaluating, building, and developing self-service concepts. As of December 31, 2012, the company operated approximately 43,700 Redbox kiosks in 35,800 locations in the U.S., Puerto Rico and Canada; and approximately 20,300 coin-counting kiosks in 20,100 locations in the U.S., Canada, Puerto Rico, Ireland and the U.K.
We project that OUTR will strongly outperform the market over the next six to 12 months. This projection is based on our analysis of three key factors that influence common stock performance: earnings strength, relative valuation and recent price movement.
Earnings Strength
Earnings strength is very positive. The company has enjoyed a very positive trend in earnings per share over the past five quarters and while recent estimates for the company have been raised by analysts, OUTR has posted better than expected results.
Ford’s earnings momentum measures the acceleration or deceleration in trailing 12 month operating earnings per share growth. The upward curvature of the plotted points in the graph above indicates that while Outerwall’s earnings have increased from $4.67 to an estimated $4.80 over the past five quarters, they have shown strong acceleration in quarterly growth rates when adjusted for the volatility of earnings. This indicates an improvement in future earnings growth may occur.
Relative Valuation
Relative valuation is very positive. Outerwall’s operating earnings yield of 8.6% ranks above 89% of the other companies in the Ford universe of stocks, indicating that it is undervalued. Ford measures the relative valuation of each company against all other companies in our research universe. Operating earnings yield, an earnings-to-price ratio based on the last three quarters of operating earnings and the current quarter’s estimate, has proven to be the most reliable relative valuation measure.
Price Movement
Price movement is very positive. Outerwall’s stock price is up 19.9% in the last 12 months, up 5.3% in the past quarter and down 8.5% in the past month. This historical performance should lead to above average price performance in the next one to three months.
Richard Segarra, CFA, Ford Equity Research, www.fordequity.com, 800-842-0207, August 2, 2013