OUTR - Outerwall

[Spekulatius]

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.

 

I think the main reason Redbox is alive is that it is cheaper to rent a movie for $1.5 at the Redbox, than to download it for $6 via broadband. This is attractive not just for poor people, but also for stingy people like us :-). I think the price raises are starting to hurt.

[InvestingOnSale]

I usually don't like anecdotes because they have the potential to be biased, but I'm going to share mine.

 

This weekend, I rented a movie for the first time from a Redbox about 5-10 minutes from my home. It was located in front of a grocery store. I download all my rentals through Apple TV usually, but, being long OUTR, I thought I should give Redbox a try. When I walked up to the machine, there was no one waiting. I browsed the movies in the machine via a large (18 inch?) touch screen on the front. I picked out the movie Boyhood, which has been released for about 6 months I believe. Once I made the selection, it prompted me to insert my credit card, which I did, and out slid a small plastic case with the Blu Ray disc from the right corner of the machine, at my chest level. I pulled it out and walked away. $2 per day. As I left, after 3 minutes at the machine, there was a grandmother with her two grandkids and another teenage girl waiting to rent. I watched the movie that night, and had until 9pm the next night to return it. (If I didn't return it, I would be charged another $2. I liked that. It didn't feel like a late charge to me, rather, the company saying, "hang on to the movie, we'll just rent it to you for another night"). I returned the movie the next day. I walked up to the machine, pressed "Return" and slid the case back into the same slot it came out of. That was it. Easy.

 

Overall, a very, very pleasant experience. For me, I will probably keep renting movies from Apple TV because of the convenience, but I can see how this type of simple and cheaper model appeals to those without the ability to download movies. (Many people assume the proposition here is renting to "poor people" who would rather pay $1.50 versus $6 for a rental. But I think it is likely that this model appeals more so to people who have no ability to download movies over the internet and watch them on their TV. "Tech un-savvy" in addition to "poor".) That cohort is shrinking, but the experience this weekend gave me some faith that Redbox's business model can last for a few more years at least.

[valueyoda]

Unfortunately, a business' valuation looks out further than a few years. I am very convinced that revenues and cash flows will drop off significantly in a few years, once the DVD becomes obsolete. I don't get people's fascination with Outerwall's outsized buybacks. It merely means that it reinvents its free cash flows by increasing the stake of non-selling shareholders in the remaining business. It makes a lot of sense for businesses like Autozone and Coca Cola whose business models are sustainable longer term, but disastrous for eventual value traps. We have seen this game play out at Blockbuster, Radioshack and many other businesses. Getting a larger part of the pie will be meaningless if the pie eventually shrinks to nothing. I think that investors should weigh substantial near term free cash flows, especially on a per share basis, relative to its market valuation with substantial long term declines in free cash flow per share. I think that Outerwall will be a great short, aside from violent short squeezes in the next 2 years.

[InvestingOnSale]

Unfortunately, a business' valuation looks out further than a few years. I am very convinced that revenues and cash flows will drop off significantly in a few years, once the DVD becomes obsolete. I don't get people's fascination with Outerwall's outsized buybacks. It merely means that it reinvents its free cash flows by increasing the stake of non-selling shareholders in the remaining business. It makes a lot of sense for businesses like Autozone and Coca Cola whose business models are sustainable longer term, but disastrous for eventual value traps. We have seen this game play out at Blockbuster, Radioshack and many other businesses. Getting a larger part of the pie will be meaningless if the pie eventually shrinks to nothing. I think that investors should weigh substantial near term free cash flows, especially on a per share basis, relative to its market valuation with substantial long term declines in free cash flow per share. I think that Outerwall will be a great short, aside from violent short squeezes in the next 2 years.

 

The same arguments about the DVD becoming obsolete could have also been made 5 years ago.

 

We need to be careful cherry picking the failed businesses as well. GameStop is a good example. 3 years ago, the same arguments were being made about video game rentals being a dying industry, hence the stock was a bad investment. But revenues are flat since then and the stock proved to be cheap, up from $22 to $44 since then.

[TwoCitiesCapital]

Unfortunately, a business' valuation looks out further than a few years. I am very convinced that revenues and cash flows will drop off significantly in a few years, once the DVD becomes obsolete. I don't get people's fascination with Outerwall's outsized buybacks. It merely means that it reinvents its free cash flows by increasing the stake of non-selling shareholders in the remaining business. It makes a lot of sense for businesses like Autozone and Coca Cola whose business models are sustainable longer term, but disastrous for eventual value traps. We have seen this game play out at Blockbuster, Radioshack and many other businesses. Getting a larger part of the pie will be meaningless if the pie eventually shrinks to nothing. I think that investors should weigh substantial near term free cash flows, especially on a per share basis, relative to its market valuation with substantial long term declines in free cash flow per share. I think that Outerwall will be a great short, aside from violent short squeezes in the next 2 years.

 

The same arguments about the DVD becoming obsolete could have also been made 5 years ago.

 

We need to be careful cherry picking the failed businesses as well. GameStop is a good example. 3 years ago, the same arguments were being made about video game rentals being a dying industry, hence the stock was a bad investment. But revenues are flat since then and the stock proved to be cheap, up from $22 to $44 since then.

 

I'd also add that it's not like OUTR disappears once Redbox is finished. Coinstar will likely be around for years and years to come. If you end up with a massive stake in coinstar and redbox cashflows paid for it while reducing debt, then it's not such a bad proposition. It all depends on the valuation of the shares at the time of purchase and how long you think redbox has left to earn cash to reduce debt and fund buybacks.

[kab60]

The way I see I see it - I like to keep things simple - Coinstar is worth the current marketcap (10x multiple). That means Redbox must cover the debt. That should take 3 years so rest is upside. My worry is management and stupid acquisitions. CEO is gone and so is EcoATM boss, but who's the new chief? If there were some proactive owners I'd feel better, but I'm not sure how much Arlington communicates with the companies.

[kab60]

Also, I like it at this price, but I expect the company to shut down (un)EcoATM since noone can blame the new CEO. But how would the market react to a big impairment you think? I would consider it positive (no more wasted capex) but I was also surprised it got hit so bad after Q2, so somebody must've assigned value to it.

[ritrading]

Also, I like it at this price, but I expect the company to shut down (un)EcoATM since noone can blame the new CEO. But how would the market react to a big impairment you think? I would consider it positive (no more wasted capex) but I was also surprised it got hit so bad after Q2, so somebody must've assigned value to it.

 

I've be more than happy to see them divest EcoATM. I always hate seeing profitable operations diluted by unprofitable ones. The most recent quarterly statement shows a significant drop in goodwill from 559M to 473M, which matches the unusual expense of 86M. I'm not sure how much more of that goodwill is attributed to EcoATM acquisition, but I wouldn't be surprised if it was the whole thing. Unfortunately, that means another 473M is up on the chopping block for future unusual expenses. The expected ROI / valuation is still very good after giving them 100% haircut for goodwill, so I'm hoping things turn around.

[TwoCitiesCapital]

Also, I like it at this price, but I expect the company to shut down (un)EcoATM since noone can blame the new CEO. But how would the market react to a big impairment you think? I would consider it positive (no more wasted capex) but I was also surprised it got hit so bad after Q2, so somebody must've assigned value to it.

 

Let's just assume the stock tanks. Their buyback program is already averaging down your shares for you. If you want, you can add yourself on top of that to leverage the impact. If the stock doesn't tank and you didn't buy, you've got nothing.

[Broeb22]

I've used the key copying kiosks at Lowe's a few times to make spare keys. These are run by a third party. This is the kind of business that I would think Outerwall might want to consider purchasing if it were to purchase anything, since it should be quite a while before large portions of the population use electronic keys.

[pantheman]

I've used the key copying kiosks at Lowe's a few times to make spare keys. These are run by a third party. This is the kind of business that I would think Outerwall might want to consider purchasing if it were to purchase anything, since it should be quite a while before large portions of the population use electronic keys.

 

Couple companies doing that now. Links below for those unaware.

 

https://www.minutekey.com/

https://key.me/

[kab60]

Also, I like it at this price, but I expect the company to shut down (un)EcoATM since noone can blame the new CEO. But how would the market react to a big impairment you think? I would consider it positive (no more wasted capex) but I was also surprised it got hit so bad after Q2, so somebody must've assigned value to it.

 

Let's just assume the stock tanks. Their buyback program is already averaging down your shares for you. If you want, you can add yourself on top of that to leverage the impact. If the stock doesn't tank and you didn't buy, you've got nothing.

Good point - I just haven't been too impressed with their recent buybacks but obviously liquidity might be an issue.

[TwoCitiesCapital]

Also, I like it at this price, but I expect the company to shut down (un)EcoATM since noone can blame the new CEO. But how would the market react to a big impairment you think? I would consider it positive (no more wasted capex) but I was also surprised it got hit so bad after Q2, so somebody must've assigned value to it.

 

Let's just assume the stock tanks. Their buyback program is already averaging down your shares for you. If you want, you can add yourself on top of that to leverage the impact. If the stock doesn't tank and you didn't buy, you've got nothing.

Good point - I just haven't been too impressed with their recent buybacks but obviously liquidity might be an issue.

 

How much of a buyback do you want? They've repurchased approximately 5% of their shares of the first 6 months of the year on top of paying a 1-2% dividend! Not many companies can measure their buyback in "% of company per quarter." 

[kab60]

I believe they "only" spent 22m in q2. That is 2/3 of what they waste on EcoATM capex for FY15 if I recall correctly. I'd prefer they bought back twice as much (and hadn't introduced the divy). However, share price was up following Q1, so here's to hoping they buy back opportunistic atm. Thanks for the input, much appreciated.

[nafregnum]

Info from ir.outerwall.com quarterly results announcements:

 

Q1: Repurchased 617,195 shares for $40.7 million and paid the company's first quarterly dividend of $0.30 per share

Q2: Repurchased 284,537 shares of common stock for $22.0 million and paid another quarterly dividend of $0.30 per share

 

So...

 

Q1 they bought 617k shares at average price of 65.94

Q2 they bought 284k shares at average price of 77.31

 

I was happy to read that they bought fewer shares back in Q2 because the price was higher.

 

From Q1 results report:

 

"Also during the quarter, the board increased our share repurchase authorization by $250 million and we repurchased approximately $41 million of our common shares, leaving us with more than $373 million remaining under our current authorization, demonstrating our continued confidence in Outerwall's long-term prospects and future cash flow."

 

From Q2 results report:

 

"We remain committed to our disciplined approach to capital allocation and returning 75-to-100 percent of annual free cash flow to shareholders,"

 

So they have $351 million left for repurchases (373 from Q1 notes minus 22 million spent in Q2) and now the price is lower than their average Q1 price.  I assume they will be opportunistic here, buying more heavily than they did in Q2.  At current levels they have enough to buy back about 5.5M shares of the current 17M float (about a third?)  I don't expect them to buy more than they did in Q1, but that's a lot of authorized dry powder.

 

IMO this is one of those ideas where the lower it gets in the short term, the better their prospects in the medium term...  Good luck everyone.

[JayGatsby]

They paid down ~$80M of debt YTD as well. I haven't dug in enough on the bond indentures to see if they can really buy back that much stock currently, but they shoudl definitely be in a good position to buy back stock (or build more Eco-ATMs!!) this quarter.

 

Depreciation should start coming down fairly significantly over the medium-term as well. They've been running close to $200M of depreciation on $100M of capex. As they buy back shares that should really help drive per share EPS.  I know it doesn't actually make a difference but I see a lot of articles and analysis saying why Outr is a good price at a 13x EPS.

 

I'm also not sure how they're impacted by economic growth / decline. My guess is they actually do better as growth slows because people try to reduce their entertainment costs and dig coins out from under the cushions.

[TwoCitiesCapital]

They paid down ~$80M of debt YTD as well. I haven't dug in enough on the bond indentures to see if they can really buy back that much stock currently, but they shoudl definitely be in a good position to buy back stock (or build more Eco-ATMs!!) this quarter.

 

Depreciation should start coming down fairly significantly over the medium-term as well. They've been running close to $200M of depreciation on $100M of capex. As they buy back shares that should really help drive per share EPS.  I know it doesn't actually make a difference but I see a lot of articles and analysis saying why Outr is a good price at a 13x EPS.

 

I'm also not sure how they're impacted by economic growth / decline. My guess is they actually do better as growth slows because people try to reduce their entertainment costs and dig coins out from under the cushions.

 

Yea - if I had the cash I would be buying more here. I'm hoping it stays here for the next few months giving me, and the company, another opportunity to continue to accumulate.

 

The depreciation should come down a sizable amount around 2016 and 2017 as heavy capex years of 2011 and 2012 rolls off and are replaced by much lower cap-ex years. Depreciation was $214M last year. I wouldn't be surprised to see it down to about $120M for the year ending 2016 which would have a major impact on the bottom line of the company with an additional $50-60M or so hitting the bottom line net of taxes.

 

Of course, this doesn't change anything for those who have been watching the cash flows, but this would effectively boost reported earnings by 50% BEFORE taking into consideration any shares repurchased this year and next year and could be a catalyst for a higher stock price.

[TwoCitiesCapital]

http://seekingalpha.com/article/3492906-outerwall-ecoatm-segment-faces-severe-headwinds

 

Good take on EcoATM and the disaster that it's been. I've been somewhat skeptical of the business in the past, but I hadn't even considered the new leasing model that phone companies are moving to destroying a large portion of the volume that EcoATM was banking on. Hopefully, the management realizes this and shuts it down once and for all. It'd be nice to stop throwing good cash after bad now that the forward looking prospects look as bad as the historical operation of the company.

 

Just admit you made a mistake, write it off, and pay out the additional cash flow to your shareholders OR develop a new growth engine internally.

[JayGatsby]

http://seekingalpha.com/article/3492906-outerwall-ecoatm-segment-faces-severe-headwinds

 

Good take on EcoATM and the disaster that it's been. I've been somewhat skeptical of the business in the past, but I hadn't even considered the new leasing model that phone companies are moving to destroying a large portion of the volume that EcoATM was banking on. Hopefully, the management realizes this and shuts it down once and for all. It'd be nice to stop throwing good cash after bad now that the forward looking prospects look as bad as the historical operation of the company.

 

Just admit you made a mistake, write it off, and pay out the additional cash flow to your shareholders OR develop a new growth engine internally.

 

The silver lining is the crappier the business is doing now, the harder it will be for them to justify capex! I wish there was some downside protection here but I haven't come up with anything other than taxes on the capex. I think the acquisition was a stock deal so any writeoff of goodwill is no tax benefit... is that right? I didn't find anything saying it's a stock deal but that's my guess.  The new CEO has no responsiblity for the past mistakes, but he'll be held responsible for any capex going forward so hopefully he's pretty cautious with this. I wish more of the Board was held responsible and not just the last CEO.

 

[TwoCitiesCapital]

http://seekingalpha.com/article/3492906-outerwall-ecoatm-segment-faces-severe-headwinds

 

Good take on EcoATM and the disaster that it's been. I've been somewhat skeptical of the business in the past, but I hadn't even considered the new leasing model that phone companies are moving to destroying a large portion of the volume that EcoATM was banking on. Hopefully, the management realizes this and shuts it down once and for all. It'd be nice to stop throwing good cash after bad now that the forward looking prospects look as bad as the historical operation of the company.

 

Just admit you made a mistake, write it off, and pay out the additional cash flow to your shareholders OR develop a new growth engine internally.

 

The silver lining is the crappier the business is doing now, the harder it will be for them to justify capex! I wish there was some downside protection here but I haven't come up with anything other than taxes on the capex. I think the acquisition was a stock deal so any writeoff of goodwill is no tax benefit... is that right? I didn't find anything saying it's a stock deal but that's my guess.  The new CEO has no responsiblity for the past mistakes, but he'll be held responsible for any capex going forward so hopefully he's pretty cautious with this. I wish more of the Board was held responsible and not just the last CEO.

 

Yea - what's done is done. I'm not going to complain about it if they shut it down and have a massive one quarter loss from the write down. I was originally expecting a big quarter for them since this Summer's box office hits became available in August/September but wouldn't mind if that's overshadowed by the headline loss of shutting down EcoATM and possibly giving me, and the management, more time to accumulate shares on the cheap. I'd be way more bullish if the money-sucking business was gone and this was just a pass-through certificate for the FCF of Redbox and Coinstar.

[JayGatsby]

http://seekingalpha.com/article/3492906-outerwall-ecoatm-segment-faces-severe-headwinds

 

Good take on EcoATM and the disaster that it's been. I've been somewhat skeptical of the business in the past, but I hadn't even considered the new leasing model that phone companies are moving to destroying a large portion of the volume that EcoATM was banking on. Hopefully, the management realizes this and shuts it down once and for all. It'd be nice to stop throwing good cash after bad now that the forward looking prospects look as bad as the historical operation of the company.

 

Just admit you made a mistake, write it off, and pay out the additional cash flow to your shareholders OR develop a new growth engine internally.

 

The silver lining is the crappier the business is doing now, the harder it will be for them to justify capex! I wish there was some downside protection here but I haven't come up with anything other than taxes on the capex. I think the acquisition was a stock deal so any writeoff of goodwill is no tax benefit... is that right? I didn't find anything saying it's a stock deal but that's my guess.  The new CEO has no responsiblity for the past mistakes, but he'll be held responsible for any capex going forward so hopefully he's pretty cautious with this. I wish more of the Board was held responsible and not just the last CEO.

 

Yea - what's done is done. I'm not going to complain about it if they shut it down and have a massive one quarter loss from the write down. I was originally expecting a big quarter for them since this Summer's box office hits became available in August/September but wouldn't mind if that's overshadowed by the headline loss of shutting down EcoATM and possibly giving me, and the management, more time to accumulate shares on the cheap. I'd be way more bullish if the money-sucking business was gone and this was just a pass-through certificate for the FCF of Redbox and Coinstar.

I think most of those flicks got pushed to the next quarter. This quarter's movies are pretty weak: http://www.redbox.com/movies/top20 . I always have trouble predicting it though. I know they've said the $25M - $75M movies perform really well for them.

 

I have a big jar of change I've been saving up to help with some share repurchases  :P

[TwoCitiesCapital]

http://seekingalpha.com/article/3492906-outerwall-ecoatm-segment-faces-severe-headwinds

 

Good take on EcoATM and the disaster that it's been. I've been somewhat skeptical of the business in the past, but I hadn't even considered the new leasing model that phone companies are moving to destroying a large portion of the volume that EcoATM was banking on. Hopefully, the management realizes this and shuts it down once and for all. It'd be nice to stop throwing good cash after bad now that the forward looking prospects look as bad as the historical operation of the company.

 

Just admit you made a mistake, write it off, and pay out the additional cash flow to your shareholders OR develop a new growth engine internally.

 

The silver lining is the crappier the business is doing now, the harder it will be for them to justify capex! I wish there was some downside protection here but I haven't come up with anything other than taxes on the capex. I think the acquisition was a stock deal so any writeoff of goodwill is no tax benefit... is that right? I didn't find anything saying it's a stock deal but that's my guess.  The new CEO has no responsiblity for the past mistakes, but he'll be held responsible for any capex going forward so hopefully he's pretty cautious with this. I wish more of the Board was held responsible and not just the last CEO.

 

Yea - what's done is done. I'm not going to complain about it if they shut it down and have a massive one quarter loss from the write down. I was originally expecting a big quarter for them since this Summer's box office hits became available in August/September but wouldn't mind if that's overshadowed by the headline loss of shutting down EcoATM and possibly giving me, and the management, more time to accumulate shares on the cheap. I'd be way more bullish if the money-sucking business was gone and this was just a pass-through certificate for the FCF of Redbox and Coinstar.

I think most of those flicks got pushed to the next quarter. This quarter's movies are pretty weak: http://www.redbox.com/movies/top20 . I always have trouble predicting it though. I know they've said the $25M - $75M movies perform really well for them.

 

I have a big jar of change I've been saving up to help with some share repurchases  :P

 

Looks like it. Mad max and Ex-Machina are both available now though. I imagine Cinderella probably didn't do to bad for parents who redbox for their kids either.

Avengers and Fast & Furious 7 will hit in October instead of early September as originally projected. Coming a little later will be Entourage, Jurassic World, Ant Man, Southpaw, and Trainwreck.

 

Still likely a strong year for them. Just hope we get rid of some dead weight.

 

 

 

[AzCactus]

I could be wrong but isn't this :

A.  One of Meachem's largest positions about 13%.

B.  His average price per share is around this number and maybe higher?

C.  He has been in this position in some capacity for about a year?

 

Any thoughts or additional information is appreciated.

 

Thank You.

[kab60]

Seems right. He bought heavily in Q2 and Q3 2014 and has added a tiny bit since. But he also said in a letter that he struggles a bit with the position (but that he thinks the risk-reward is good).

[AzCactus]

Do you have that letter that you could post or otherwise more specifically describe what he struggles with?  Other than management burning cash (a real possibility to be sure)---this seems like a very solid investment with a lot of fcf.