Pitney Bowes Inc. (PBI), Weight Watchers International, Inc. (WTW), Outerwall Inc (OUTR): Avoid These 3 Value Traps

One reason for this decline is likely the enormous number of free weight loss and calorie counting apps available for smartphones. These apps essentially do what the Weight Watchers International, Inc. (NYSE:WTW)’ program does for free, and I suspect that Weight Watchers will have trouble maintaining its extremely high margins going forward.

Analysts are expecting earnings to decline, with the average estimate at $3.65 per share this year and $3.22 per share next year. These estimates are down from $4.23 per share in 2012.

The death of the DVD

Automated-retail company Outerwall Inc (NASDAQ:OUTR), formerly Coinstar, derives most of its revenue from Redbox movie-rental kiosks. Although the company is not in decline yet, growth is slowing, and the shift to digital promises to eventually make the Redbox business obsolete.

Outerwall Inc (NASDAQ:OUTR) trades at about 12.2 times last year’s earnings and 9.7 the average analyst estimate for this year’s earnings. If the company were capable of matching its growth over the last decade, the stock would be a great deal. But increasingly, consumption of content is shifting from disc-based to digital, with the popularity of Netflix a glaring example. Outerwall, through a partnership with Verizon, has its own streaming platform, but with intense competition from Netflix and Amazon.com it will be difficult to turn a significant profit from this venture.

Outerwall Inc (NASDAQ:OUTR) is testing some new concepts, such as coffee vending machines, but none of these have the potential to become as big as Redbox. Exactly when the decline starts is anyone’s guess, but physical disc rental is a dying business. And with it goes Outerwall’s most important component.

The bottom line

Just because a company looks cheap doesn’t mean that it is. Many times a low P/E ratio indicates a dismal future instead of value, and these three companies all face big problems going forward. Buying a declining business is a risky move, and the price needs to be extremely cheap for it to make sense. None of these companies are cheap enough, and they should probably be avoided.

The article Avoid These 3 Value Traps originally appeared on Fool.com and is written by Timothy Green.

Timothy Green has no position in any stocks mentioned. The Motley Fool owns shares of Weight Watchers International.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.