OUTR - Outerwall

[ritrading]

The Coinstar thread seems to be dead. Making an OUTR thread as the company has been renamed. The most common response I get when pitching this company is that DVDs are going the way of the dinosaurs. I agree. But it won't happen tomorrow. Large portions of America still doesn't have broadband. It takes years to lay down wires and it also take commitments from residents to use the service to make the project profitable. That means sparse areas of America will never have wires in the ground. If anything, it would be less unprofitable to provide better cell service in those areas. Until more of America has broadband, there will be a market for DVDs and a place for OUTR. I do not see NFLX as a competitor. People use one or the other, usually out of necessity, and rarely switch between. Arguments against OUTR have resulted in a price that yields exceptional expected returns.

 

Took a position in Outerwall $62.78 in Feb 2015. They've done some some very well timed repurchases. As a result, the current price of 81 still provides for one of the highest expected rates of returns in my watchlist.

 

I'm using Twelve Tailing Month data, from AdvFn.

 

About the company

-Operates Coinstar and Redbox vending machines.

-1.5BN Market Cap

-They have a free cash flow of 363M

-24.2% ROI in terms of FCF / MV.

-8.22% ROI in terms of EPS / Price

-Understandable business model. Set up a vending machine and update / replenish inventory periodically.

-Very high operating margins due to minimal human intervention required.

-Walmart, Walgreens, Kroger is about 15% of revenues.

-Has anti takeover provisions

-Bought back ~33% of outstanding stock in 2013, and was very well timed.

-OUTR is unlikely to grow, but is a very strong cash cow.

-Only their Coinstar and Redbox machines are profitable right now. They take small losses on their other ventures.

 

Financial statements

-I haven't found any questionable accounting policies.

-Revenues are not decreasing

-Accounts receivables not increasing out of ordinary

-positive cash flow from operating

 

My research was done in Dec, happy to hear about new developments and things I might have missed.

[gfp]

I'm not sure I would call their repurchases "well timed," but I get your point. 

 

More than broadband availability limitations, I think the primary factor keeping this business alive is poor people.  Poor people don't have broadband.  They get the internet on their phones and at the public library.  A lot of them have DVD players and can come up with a couple bucks to rent a movie for the night.  It's easy for a bunch of professional investors to forget how many poor people there are in the United States and how they live.  My wife has some tenants well below the poverty line and it's illuminating to see inside the apartments.

[KCLarkin]

My main concern was the debt. The debt is easy to manage now but it does add significant risk if the business deteriorates more quickly than expected. See weight watchers for a cautionary tale.

[ritrading]

I'm not sure I would call their repurchases "well timed," but I get your point.

 

I built my own software which shows intrinsic value vs market price. I meant well time as in I didn't see them repurchasing shares when their market price was grossly above intrinsic. I didnt find anything concrete in the 10-K like Berkshire, where repurchases are only allowed at some % above book.

 

It's easy for a bunch of professional investors to forget how many poor people there are in the United States and how they live.

 

Very well said. It's unfathomable for some of my peers that there are actually people in the US without broadband at home and data plans on their cellphones. This is important for me because it gives me reasonable confidence that OUTR wont see a 50% drop in revenues in a single quarter.

[frommi]

Based on my model it is now at fair value with a 10% fcf decline starting next year. The underlying decline in Q1 2015 was already higher than 10%, but was of course masked by the price increase.

Where do you see intrinsic value and how did you calculate that?

[ritrading]

Based on my model it is now at fair value with a 10% fcf decline starting next year. The underlying decline in Q1 2015 was already higher than 10%, but was of course masked by the price increase.

Where do you see intrinsic value and how did you calculate that?

 

Intrinsic value is just something of my own philosophical making. I define it as the price at which I can expect an X% rate of return. I use 15% for X because I can probably be better off with an index fund if I go lower. I believe the actual value  of expected return sits somewhere between FCF / MV and EPS / P, which are measures of cash accounting vs accrual accounting.

[JayGatsby]

Generally I agree with you. This was my largest position, but reduced it by about 50% in the mid 70's. Generally I agree with you that DVDs (and coins) have a longer tail than most people expect. Their low overhead allows the business to stay profitable as revenue declines. I also don't think disks will go away completely the same way VHS did as a better technology takes over. Personally Idon't like that AppleTV only gives me 24 hours to watch a movie so if it's a long movie I'll get it on DVD (2 day rental). I also have internet issues not infrequently and live in a city.

 

The biggest reason I reduced my holdings was management and the Board keep saying they're a leader in automated retail. They've spent something in the ballpark of $500M on EcoATM, which is pretty significant for a company with a $1.5B market cap. I can't see any indication that EcoATM will be a success. Not many managers like to manage declining cash flows, so my fear is that they go find another EcoATM.

[yadayada]

What I dont understand is that analyst estimates are still between 1.28 and 2.4$ in EPS. When last quarter they did 3$ if you exclude the one off items. And this does not even take into account the lower capex! It really seems analysts are asleep on this one. It is a nice stock to gamble on some options untill they wake up.

[rsmehta]

Don't forget the share buyback either!

 

    They are doing a great job delivering. The price increase is having a huge impact that can't be understated!!

[yadayada]

Does anyone have statistics for movie rentals in the USA in Q2?

[TwoCitiesCapital]

Does anyone have statistics for movie rentals in the USA in Q2?

 

Not on rentals, but box office revenues have been reasonably predictive of the strength of OUTRs and those were up 4% YOY as opposed to the 2% in Q1. I think we'll see some great results once this Summer's box office releases are in the machines come September/October.

 

http://www.boxofficemojo.com/quarterly/?chart=byquarter&quarter=Q2&view=releasedate

 

[frommi]

You can find the DEG numbers here as soon as they are published: http://degonline.org/category/data-resources/

[insight]

For the last few months we have been tracking the number of ecoATM's reported on the ecoATM site. Here is a link to the GoogleSpreadsheet.

 

https://docs.google.com/spreadsheets/d/1OYHbXNC9vPz_-sZIvrpOVH4ftfeAmGP2RewAKyVFo3E/edit?usp=sharing

 

The numbers returned on the site have not corresponded to the reported numbers by Outerwall. We were curious, however, if tracking this would give us an idea of the rate of additions.

 

A few weeks ago the numbers started dropping.

 

There are several possible reasons why the numbers reported on the ecoATM web site might be entirely inaccurate.

 

[yadayada]

If they close it down it would mean 400m$ in FCF. Maybe that is why the increased buyback as well? They expected something like this. And they have no emotional ties now to this business (and it is sort of obvious it needs ot be closed down).

 

Seems a 3.8x FCF multiple is too cheap in that case. Im going to take a small option gamble again . Thanks for posting that info insight :).

[rsmehta]

results out,

 

  looks like EcoATM continues to be in the doghouse,

 

  Redbox results also slowing...

 

down over 8%

[TwoCitiesCapital]

results out,

 

  looks like EcoATM continues to be in the doghouse,

 

  Redbox results also slowing...

 

down over 8%

 

Looks like that EcoATM site was wrong about the changes in kiosks. That spreadsheet had them peaking at 200 kiosks lower than what they ended the quarter at. I just wish I saw what the management sees in EcoATM and why the strategy of a slow rollout while burning $7M a quarter seems to be the preferred method of doing business....

 

It wasn't too bad of a quarter beyond the impairment charge though. They repurchased about half the shares that they did last quarter, but it was still about 1.5% of shares outstanding and YTD FCF is about $140M which was in line with the low side of my annual expectations of $280-$320M. If the Q3 is a blowout, like I'm thinking it may be, we might still hit $320M for the year. I don't think we'll see prices much above $80-$85 per share in the near term otherwise.

 

All that being said, every pull back in the past two years has been an opportunity to load up. If it falls back to the mid-60s I'll be repurchasing some, or all, of the 40% I sold at $81 a few weeks back.

 

 

 

 

 

[kab60]

I sold all mine at 81. They need a CEO who is okay with running a shrinking business. I like the company but not the capital destruction going on. Hopefully the new chief does a big kitchen sink quarter and closes UNecoATM.

[Txvestor]

I sold all mine at 81. They need a CEO who is okay with running a shrinking business. I like the company but not the capital destruction going on. Hopefully the new chief does a big kitchen sink quarter and closes UNecoATM.

 

I agree. EcoATM=Throwing more good money after a bad acquisition.

I thought the old CEO was pushed out for the EcoATM acquisition but maybe not, we never did get a reason. The excuse after excuse they give for EcoATM is just plain crazy, more competition from carriers is the latest, as if that's something novel. And if now, when they have their pick of locations they can't make money, how exactly do they plan to scale up without expanding losses. They moved 60machines, probably cuz they were collecting cell phones as frequently as i successfully catch fish.

I am also a little concerned about the redbox division performance, rental volumes down 14% and were it not for the price increase they would have had a dramatic drop in revenues.As it stands they were essentially flat but that can't last because they can't raises prices every time. I sure hope the release schedule helps out with a heavy boost to revenues in the back half of the year. It is good to see the share buybacks continue and all, however operational leverage can work both ways. This is for sure a real battleground stock and one to keep a close eye on.

 

[yadayada]

I think rental is down because of the price increase. Hopefully people just get used to new prices and form their habit again. Im out for now though.

 

Honestly Ecoatm is a disaster, they forecasted 100-120k$ per machine, and they are stalled at 45k$ per machine now. How can they even expect to make a profit like this? And you can bet they installed the machines in the best area's first. Corporate bullshittery at it's best. Better to watch office space one more time :D

[TwoCitiesCapital]

I think rental is down because of the price increase. Hopefully people just get used to new prices and form their habit again. Im out for now though.

 

Honestly Ecoatm is a disaster, they forecasted 100-120k$ per machine, and they are stalled at 45k$ per machine now. How can they even expect to make a profit like this? And you can bet they installed the machines in the best area's first. Corporate bullshittery at it's best. Better to watch office space one more time :D

 

Agreed with ecoATM. Rentals were down 14% YoY this quarter. But that was the exact same amount they were down in Q1 YoY too. The decline has stayed very stable and isn't accelerating so this decline in rentals shouldn't be "news." I'll take a 14% volume decline for a 25% price hike any day.

[yadayada]

What will probably happen (knowing myself), some cool releases will come out, people will say 'ah fk it for this time ill rent this cool movie despite higher price'. And then fall back into old habbit.

[TwoCitiesCapital]

What will probably happen (knowing myself), some cool releases will come out, people will say 'ah fk it for this time ill rent this cool movie despite higher price'. And then fall back into old habbit.

 

I certainly wouldn't expect volumes to pick up for much else than a strong release schedule. At the same time, people are too keen to jump on the bandwagon and say that the company is dying due to a 14% fall in rental volume. Let's not forget the company had the same decline last quarter and still had record revenues. We're far from the deathbed of this company.

 

I'd simply say the news of Outerwall's death is greatly exaggerated, but that doesn't mean it's killing it either. The volume decline is due solely to the price hike - I wouldn't expect much of a recovery but I also don't expect demand to fall of a cliff like some people seem to think with a 14% decline.

 

We need $250-300M in FCF annually for the two or three years for the equity investment to make really make sense. The real problem is ecoATM eating into that potential return. As long as we're hitting that mark, I'm ok with management trying to prolong the lifespan of the company through investment (though am disappointed with that alternative being ecoATM). The moment that FCF drops below $250M though, I'd better see the plug pulled otherwise I will be a seller.

 

 

[TwoCitiesCapital]

http://www.prnewswire.com/news-releases/outerwall-appoints-erik-prusch-chief-executive-officer-300121532.html

 

Yea, this doesn't quite sound like the guy we need....

 

Erik is aligned with our disciplined and balanced approach to driving revenue growth through prudent investments and continuing to improve operational efficiency throughout the organization. We look forward to working closely with Erik to continue driving profitable growth as we develop, scale and manage our businesses."

[yadayada]

Let me introduce to you the ´corporate translator'.

 

You insert this raw input:

Erik agrees with us that we should gamble with shareholders money to maybe get a big fat stock option payday, so we can finally rawdog those high class prostitutes, instead of the 200$ ones. If you forget about the 500 million$ or so we pissed away, we did quite alright! And something about revenue growth at whatever cost I think? Wall street always seems to like that.

 

Jim was it alright to mention the 'at whatever cost bit'?

No?

Oh it's no problem?

alright. Who knows maybe that Ecoatm thing will make some money some day. Get me those stock options already.

 

>> insert message in corporate translator;

 

//\\dljflkdjlfjldjlfldkflj **corporate bullshit translation in progress* klsdfjlksdfjld *insert 56k modem beeping sound** lsdjflsjdfljsdlkfjdlfkjdslf//\\

>>And voila:

Erik is aligned with our disciplined and balanced approach to driving revenue growth through prudent investments and continuing to improve operational efficiency throughout the organization. We look forward to working closely with Erik to continue driving profitable growth as we develop, scale and manage our businesses."

[Picasso]

I've been negative and wrong on OUTR so far, but what else can management say?  If they don't mention revenue growth then the bears come out in full force and point to the companies own admission of a declining business.

 

Coinstar and Redbox have so far generated a ton of cash. You have stocks out there like IBM that focus on maximizing what they have and Wall St dislikes it as well. I suppose it just depends on the temperament on the market at any given time with these battleground stocks. I mean look at Vistaprint. That things all over the place to where you'd think they went from profits to losses every quarter.