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Automated retail kiosk operator Outerwall ( OUTR ) late Thursday beat lowered expectations for the December quarter. But shares of the Bellevue, Wash.-based company fell Friday as the firm’s guidance pointed to a rough year ahead for its Redbox DVD rental business. Outerwall stock was down 15% in midday trading, below 28, on the stock market today . It had fallen as much as 24% earning and is at its lowest level in six years. Piper Jaffray analyst Michael Olson on Friday threw in the towel on Outerwall stock, lowering his rating to neutral from overweight and slashing his price target on the stock to 32 from 57. “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 year-over-year revenue and EPS decline,” Olson said in a report. Redbox competes with streaming video services like Amazon.com ( AMZN ), Hulu and Netflix ( NFLX ). Olson is modeling for a 26% year-over-year decline in rentals per Redbox kiosk in the first quarter and a 17% decline for all of 2016. Outerwall reported Q4 EPS of $1.43 on sales of $527.2 million, ahead of previously lowered guidance and above the Street view of 64 cents on $512.3 million. But the company’s outlook for 2016 is materially below consensus. Outerwall anticipates 2016 EPS of $5 to $6.30 vs. the Street’s estimate of $7.14. Outerwall CEO Erik Prusch remained upbeat about Redbox, which provided 77% of revenue in Q4, despite acknowledging ongoing secular declines in the market. “Redbox is a compelling business, providing new movie releases to millions of loyal consumers at a great value,” he said in a statement . “We will manage the business for profitability and cash flow, and we will continue our focus on expense management, operational efficiencies and network optimization.” Prusch said he sees a long life for the DVD rental business. “We are confident that millions of consumers will continue renting from Redbox for many years to come, as a majority of our customers use Redbox to complement digital alternatives,” Prusch said. Outerwall also operates Coinstar coin-redemption kiosks and ecoATM used-electronics-purchasing kiosks. Redbox generated 135.8 million rentals in the fourth quarter, down 24% from the same quarter a year earlier. In 2016, Outerwall expects to reduce its number of Redbox kiosks by 1,000-2,000. It ended 2015 with 40,480 Redbox kiosks, compared with 42,280 at the end of 2014. Dougherty analyst Steven Frankel reiterated his neutral rating on Outerwall in a report Thursday. “While share repurchases and other forms of financial engineering are helping the EPS line, the secular decline in DVD demand and execution issues at Redbox are creating significant challenges,” Frankel said. “Until we see signs of stability at Redbox, we view Outerwall as the classic value trap.” However, Wedbush analyst Michael Pachter believes Outerwall can wring more profit out of its operations. In a note Thursday, he maintained his outperform rating on the stock but cut his price target to 40 from 59. Scalper1 News
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