The Revival of Redbox: Why Video Rentals Are Far From Dead

I’m going against the grain today and recommending you pick up shares of Outerwall. While you might not have heard of Outerwall, chances are you’ve heard of Red Box, which accounts for over 80% of its revenue. This stock is hated because it’s in a sector that is simply declining. Everyone knows that video rentals are so 1990s. Many people look at RedBox and see Blockbuster. But this comparison is simply unfair. Unlike Redbox, Blockbuster’s brick & mortar business model was extremely expensive to run. These high expenses made it difficult for the company to compete with Video on Demand offerings. In contrast, Redbox has minimal expenses and as a result is able to lower its prices well below those of its video on demand cohorts, giving it a serious competitive edge. But what I like even more is this company's financials. It is a pure cash cow, and it gives that cash right back to its shareholders. The company has a remarkable 17% free cash flow yield, very low leverage ratio, and is expected to buy back 20% of its shares next year. That's one of the highest levels across the entire market. It just implemented a 25% price increase on rentals, which should drive earnings nearly 20% higher next year. See, since most Redbox rentals are impulse purchases, its customers are relatively indifferent to price increases. We saw very little pushback last time it raised prices in 2011. And with the company trading under 10 times price to earnings, I think it's a perfect time to snap up this compelling value investment opportunity.