Outerwall Inc (OUTR): New Name, New Business?

The product is genius. The company offers a convenient way to dispose of a broken or outdated phone and give its customers cash on the spot. The safety features (customers must provide an ID for scanning and supply a fingerprint to sell their phone or MP3 player) are in-line or above those of most pawn shops. A spokesperson commented that only 1% of the phones it purchases each year are stolen.

Analysts have high expectations for ecoATM, expecting operating margins in line with GameStop Corp. (NYSE:GME)‘s used phone business (30%+) and a market potential in the hundreds of millions of dollars. More specifically, one analyst wrote that he expects revenue to double to $200 million by 2015. That would add $.40 per share in net income per his analysis, with growth in line with the 30-40% compound annual growth at GameStop Corp. (NYSE:GME). Each ecoATM is estimated to generate $200,000 in sales each year.

The company is differentiated by being the only national brick and mortar service that pays cash for broken devices.

The market for this product is enormous. In the first quarter, global smartphone sales reached 216 million units. Meanwhile, customers are slowing their upgrade cycle, and used phones are retaining more and more of their value. One would only expect the used phone market to grow in value as phone innovation slows.

Future beyond DVDs

Outerwall Inc (NASDAQ:OUTR)’s name change reflects its new future as a micro real estate company, but its valuation does not. The company trades at just 7 times TTM free cash flow, giving it a free cash flow yield of greater than 14%.

Outerwall has the potential to be the leader of automated services for years to come. I’m keeping my outperform pick on CAPS in place. Investors are letting it go too cheap, ignoring the potential in its up-and-coming products, and placing much too importance on cash cows that still have years of cash flow ahead of them.

Jordan Wathen has no position in any stocks mentioned. The Motley Fool recommends Starbucks Corporation (NASDAQ:SBUX). The Motley Fool owns shares of GameStop and Starbucks. Jordan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Outerwall: New Name, New Business? originally appeared on Fool.com and is written by Jordan Wathen.

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