Seagate Technology PLC (STX), Outerwall Inc (OUTR): Small-Cap Tech Names Cheap After Earnings

That sent investors running for the exits, fearing that the company’s cash flows may quickly dwindle. Executives and analysts were quick to point out that declining revenue came during a period of weak Hollywood releases. Future quarters should fare better.

While Redbox’s second-quarter results were less than exceptional, the company has a new rock star kiosk in its product line, the ecoATM. Outerwall Inc (NASDAQ:OUTR) purchased the remaining 77% of the company it didn’t own during the quarter, and it has big plans in place for 2013.

ecoATM turns unused and broken phones into cash. With 650 installed kiosks in 2013, the company reports average revenue of $100-$120,000 per unit, at an all-in cost of $35,000 per unit. The supplemental slides reveal that the payback period is 14-22 months, suggesting that its margins are in the range of 15-20% on every device it purchases.

ecoATM is Outerwall Inc (NASDAQ:OUTR)’s next big hit. The company believes it could have as many as 800-900 ecoATMs in place by the end of 2013, which would generate at anywhere from $14.4-22.5 million in new free cash flow using Outerwall Inc (NASDAQ:OUTR)’s data. Given the quick 14-22 month payback period for units in malls, one would expect that ecoATM can be profitably placed in lower traffic areas.

EcoATM capitalizes on emerging trends in technology. Phones are lasting longer as upgrade cycles slow, increasing the sales value of older models, growing ecoATM’s core business. Meanwhile, only a small percentage of phones are currently recycled. The EPA suggests that only 18% of devices that can be recycled are recycled each year. Given that the company is still ramping up its installed base, it hasn’t made use of national advertising to drive traffic; the results are all organic. Given a modest marketing investment, ecoATM’s earnings could grow significantly.

At an equity value of 7 times free cash flow, Outerwall Inc (NASDAQ:OUTR) is a cheap stock with plenty of future opportunity.

The article Small-Cap Tech Names Cheap After Earnings originally appeared on Fool.com and is written by Jordan Wathen.

Jordan Wathen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Jordan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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