Outerwall, Pandora, Achillion, hedge funds: It’s no secret that at Insider Monkey, we track hedge funds (discover why here). While a good portion of our analysis covers quarterly 13Fs with the SEC, we also make it a point to cover day-to-day 13D and 13G filings. The former typically details the moves of an activist investor in a particular company, while a 13G indicates when a passive stake has been taken. Over the past week, there were a few moves that caught our eye in particular; let’s take a look.
In one of the latest filings on last Friday afternoon, Jana Partners and Barry Rosenstein disclosed a 13.5% stake in Outerwall Inc (NASDAQ:OUTR) via a 13D. Shares of the automated kiosk company popped significantly in the last five minutes of regular market action last week, finishing Friday up 9.4% and +16.5% for the entire week.
As is the case in most of Jana’s activist positions, the filing itself mentioned a few motives why Rosenstein and his team are bullish. The reasons mentioned by Jana include: 1) Outerwall’s stock is “undervalued,” 2) the possibility of a sale of Outerwall in parts or as a single transaction, and 3) a “significant return of capital” most likely in the form of a share buyback or dividend issuance.
For starters, we agree with Jana that Outerwall is significantly undervalued. Shares trade at a mere shell of the multiples they truly deserve, and at 10.6 times forward EPS and a PEG of 0.66, earnings prospects are particularly cheap. Wall Street expects Outerwall to generate a bottom line growth of 20% a year through 2018, which looks to be driven primarily by the company’s Redbox and Coinstar kiosks. In addition to movie rentals and coin counting, Outerwall’s partnership with Starbucks Corporation (NASDAQ:SBUX) to deliver Seattle’s Best coffee through Rubi-branded kiosks has long-term potential, and its acquisition of ecoATM is a smart niche investment.
While it’s unknown just what assets Jana would seek to shave off in a partial sale, it is worth mentioning that Outerwall did reject a takeover bid from Providence Equity Partners last year. With over $250 million in the bank, a small dividend is a possibility but for a company that booked $2.2 billion in revenue last year, a market cap of only $1.6 billion means that a full buyout might be the first thing Jana pushes for. We’ll continue to watch this situation very closely, and you’d be well served to keep an eye on Barry Rosenstein’s hedge fund moving forward.
This was perhaps the second biggest hedge fund trade of the past week, aside from Dan Loeb’s Sothebys (NYSE:BID) slam that we already covered here on Seeking Alpha. We’re talking about Stephen Mandel and Lone Pine Capital’s move into Pandora Media Inc (NYSE:P). In a 13G filing disclosed last Thursday, Mandel’s fund announced a 5.3% stake in the streaming music provider. Due to the fact that this was a passive filing that wasn’t activist in nature, we can assume that Mandel will not seek to disrupt Pandora’s current business model.
Despite the fact that Pandora faces increasing competition from Apple Inc. (NASDAQ:AAPL) and Google Inc (NASDAQ:GOOG)’s own radio services, Mandel looks to be bullish on the company’s advertising growth. On top of boosting its commercial frequency while continuing to perfect its video ad strategy, Pandora’s recent decision to name Brian McAndrews as CEO is promising.