Outerwall Inc (OUTR), Arctic Cat Inc (ACAT): Monday’s Top Upgrades (and Downgrades)

What are the outer limits for Outerwall stock?
Finally, we come to Outerwall Inc (NASDAQ:OUTR)– the company originally known for its Coinstar coin-counting kiosks, and now perhaps best-known for its Redbox DVD vendors. (Outerwall Inc (NASDAQ:OUTR) also has a new business now, recycling used mobile phones, tablet computers, and mp3 players.)

Pacific Crest isn’t particularly impressed by any of these ventures, however, and on Monday downgraded the stock to “underperform.” The analyst is particularly unenthused about the DVD rental business, which it sees falling victim to online streaming of videos, and for which Pacific Crest is forecasting “double digit” revenues declines for the foreseeable future.

They may be right about that. DVDs do appear to be going the way of the dodo. And yet, most analysts still think that Outerwall Inc (NASDAQ:OUTR) will beat the odds, and keep its business growing at about a 20%-per-year clip. If they’re right, and Pacific Crest is wrong, then this could be a particularly dangerous stock to short.

Outerwall Inc (NASDAQ:OUTR) only costs 13.5 times earnings, after all, which seems a very modest price to pay for 20% growth. Its trailing free cash flow number is $140 million — 8.5% ahead of reported GAAP earnings, which makes the stock look even cheaper on the one hand, and isn’t the kind of number you’d expect to see at a business in decline on the other.

Long story short, while I’m not fully convinced of the stock’s long-term viability myself, I’m pretty sure Outerwall Inc (NASDAQ:OUTR)’s share price today builds in a big enough margin of safety that there’s no reason to rush right out and sell (or short) it. Investors who are selling the stock in reaction to Pacific Crest’s downgrade today are, in my opinion, overreacting.

The article Monday’s Top Upgrades (and Downgrades) originally appeared on Fool.com and is written by Rich Smith.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool owns shares of Arctic Cat.

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