Outerwall Listens to Jana -- Should You?

Outerwall Listens to Jana -- Should You?

An activist investor presence in tech-kiosk company Outerwall has yielded results. In the company's recent earnings announcement, management made a motion toward returning capital to shareholders -- an action championed by Jana Partners, an activist group with a 13.5% stake in the business. Outerwall's challenges aren't over yet, though, as the company still faces rental declines in its core Redbox business. Earnings met guidance that had previously been lowered, giving the market a satisfying, if uninteresting, picture of the company's current state. For investors, the new plan to return 75% to 100% of free cash flow in the form of buybacks is indicative of a closely listening management team. Here's what may come next.

Not growing, but printing cash
Despite concerns regarding future demand for its DVD rental kiosks, Outerwall actually beat analyst projections in its fiscal third-quarter report.

Adjusted earnings per share came in at $0.97 per share -- $0.09 better than analyst estimates, but well under the year-ago haul of $1.26 per share. Sales still rose nearly 10% from the same quarter of 2012, and the company was satisfied with Redbox, Coinstar, and its newly acquired ecoATM -- a kiosk that buys personal electronics for cash.

The company announced its plans to return nearly all of its free cash to shareholders. That is a victory for Jana and perhaps a harbinger of more cooperation between the activist fund and Outerwall management.

So what else is Jana pushing for?

More levers to pull
Jana initiated its position because it believes the company is fundamentally undervalued. That value, it suggests, could be realized by better capital allocation, such as cash back to shareholders, shutting down Redbox Instant (a failed attempt at taking market share from Netflix, Amazon.com, and Hulu), and/or shuttering a coffee kiosk venture. Other options include the possible sale of the company.

Management has so far made no comment that it plans to pull the plug on Redbox Instant, but it makes sense. The deal with Verizon was never particularly advantageous to Outerwall, and the giants in the streaming business were bound to keep the companies' venture grounded.

For investors, there is plenty of reason to feel good about the company. Redbox and Coinstar continue to generate loads of cash, and management seems now convinced that the destination for that money is back to shareholders. Over the long run, DVD demand will surely decrease, but there is no immediate end to this business. Outerwall and its investors will continue to see plenty of cash coming in the door. Furthermore, investors should be encouraged by management's willingness to discuss the strategic alternatives to the business. Whether the company sells itself for a nice, quick premium or can boost its already strong cash flow by exiting the cash-burning segments, investors will see an improvement in coming periods. Overall, Outerwall is set to deliver value to shareholders.

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The article Outerwall Listens to Jana -- Should You? originally appeared on Fool.com.

Fool contributor Michael Lewis has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Netflix. The Motley Fool owns shares of Amazon.com and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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