OUTR - Outerwall

[AzCactus]

Am I the only one wondering if Arlington is adding at these prices?

 

I think it is quite likely alan is acting on this. Whether he is adding or selling I have no idea ;).

This is a tough one. If the revenues continue to decline dramatically, this could go to zero and the shorts would have had it right. It will also throw managements judgement into disrepute, having used cash flow in the most idiotic way. Already their recent acquisitions, buybacks at much higher prices with balance sheet debt etc. do not at this juncture appear prudent.

That said, all it takes is one good quarter to see this thing take off like a rocket. And if subsequently we find out that they loaded up on buybacks at these levels, it would be a kicker.

I frankly don't care what happens to the stock near term, but I do need to see the revenues start to stabilize one of these quarters. Right now their price increase recently seems more like a desperate attempt at makntianing revenue and profitability than somethign done out of strength.

Surely the idiots in management know their business better than what it appears?

 

Redbox revenues are down 8% if we hit the management's lower end guidance for the year. That's more than I expected but it is far from the disaster scenario. It does push us more closely in the direction that the bears said it would go though. It's certainly not the exciting outcome that many bulls hoped for with the price increase.

 

It's hard for me to buy the management's discussion about a weak box office with such a strong release Summer, but there was a poster who mentioned that Redbox said it doesn't make money on the blockbusters. If that's the case, maybe it's simply the # of releases that matters to Redbox. If we look at just the # of releases, 2015 has had 7-8% fewer titles released than last year which would align almost exactly with the drop in revenue. Maybe the management does have some credibility when discussing a weak box office?

 

Here's the thing: Except for a few shares a year ago---Arlington has only been adding OUTR shares.  I don't know that the entire thesis changes because of them lowering their guidance a bit.  If someone liked this at $55 they would seemingly love it at $44, unless the business becomes a zero. 

[thefatbaboon]

It's much worse that the -8% implied by revenues because they took a huge price increase this year. Unless you think that they can take the same amount of price each year?  On a simple unit rental basis we look to be down between -20% and -25% for the year. That's a hell of a lot. I'm long and remain long but like txinvestor said this needs to get to a less dramatic decline rate. If it continues like this year over the next few years  I doubt I'll do well.

 

Fwiw I notice Eric has hired a new head of Eco. And for those interested the cfo is presenting tomorrow.

[TwoCitiesCapital]

Am I the only one wondering if Arlington is adding at these prices?

 

I think it is quite likely alan is acting on this. Whether he is adding or selling I have no idea ;).

This is a tough one. If the revenues continue to decline dramatically, this could go to zero and the shorts would have had it right. It will also throw managements judgement into disrepute, having used cash flow in the most idiotic way. Already their recent acquisitions, buybacks at much higher prices with balance sheet debt etc. do not at this juncture appear prudent.

That said, all it takes is one good quarter to see this thing take off like a rocket. And if subsequently we find out that they loaded up on buybacks at these levels, it would be a kicker.

I frankly don't care what happens to the stock near term, but I do need to see the revenues start to stabilize one of these quarters. Right now their price increase recently seems more like a desperate attempt at makntianing revenue and profitability than somethign done out of strength.

Surely the idiots in management know their business better than what it appears?

 

Redbox revenues are down 8% if we hit the management's lower end guidance for the year. That's more than I expected but it is far from the disaster scenario. It does push us more closely in the direction that the bears said it would go though. It's certainly not the exciting outcome that many bulls hoped for with the price increase.

 

It's hard for me to buy the management's discussion about a weak box office with such a strong release Summer, but there was a poster who mentioned that Redbox said it doesn't make money on the blockbusters. If that's the case, maybe it's simply the # of releases that matters to Redbox. If we look at just the # of releases, 2015 has had 7-8% fewer titles released than last year which would align almost exactly with the drop in revenue. Maybe the management does have some credibility when discussing a weak box office?

 

Here's the thing: Except for a few shares a year ago---Arlington has only been adding OUTR shares.  I don't know that the entire thesis changes because of them lowering their guidance a bit.  If someone liked this at $55 they would seemingly love it at $44, unless the business becomes a zero.

 

I don't disagree that Arlington may be adding here. I do disagree about the guidance and the effect on the stock price. I've been thinking about this for the past few days. The guidance downwards is a disaster if it's caused by a radical shift in consumers away from Redbox. It's not a disaster if it really is due to a weak box office slate. The problem with lowering the guidance is that it brings a lot more uncertainty into projections over their managed decline. We've also learned, that at least for this year, the hike in price likely had a 0 effect on revenue/FCF in total and that calls into question the levers they have to pull to maximize FCF in a secular decline.

 

If the 8% drop in revenue is simply because box office titles are down 7-8%, then this is still extremely bullish and trading at $44 is ridiculous and the company would do well to repuchase as many shares as they can at $40.

 

If the 8% decline in revenues is due to the fact that a ton of people stopped using Redbox permanently through the year, then that's a massive issue and $44 may not be low enough because the decline will only accelerate from here. maybe 20-25% next year.

 

There's been new information since it traded at $55 and we have to take that into account. We can't just say 'if you loved it at $55, you must really, really love it at $44 to stay logically consistent.' I'm still moderately bullish, but until I know the reason for the decline in revenue projections, it's hard to pull the trigger on new shares at these prices.

[JayGatsby]

We've also learned, that at least for this year, the hike in price likely had a 0 effect on revenue/FCF in total and that calls into question the levers they have to pull to maximize FCF in a secular decline.

Looks like it was the wrong move to me. It was a pretty aggressive price hike. Probably part of the reason Horak was fired. Unfortunately, as baboon said, it's tough for them to reverse this and get back those customers. I keep thinking the studios will be more aggressive with price but they aren't. I feel like a movie rental has been $6 for ~20 years while the cost of production has gone way up? No wonder the studios are struggling.

 

We're buying Redbox at ~2x at this level.

[thefatbaboon]

I would really like to see deep dive data on redbox consumers. Very specifically I'd like to see if there is a meaningful class of consumers that is stable or had a slower decline rate. I would love to see breakdowns according to geography, city/country, rich/poor neighbourhoods, dsl/cable availability.

 

Second to that I want more information of flexibility of the cost structure.

 

If there are any analysts who read this board and are attending tomo conference with the cfo please give him relentless questions on the composition of the redbox consumer.

 

 

 

[Travis Wiedower]

Fwiw I notice Eric has hired a new head of Eco.

 

I take this as a negative. Shows he has no intention of shutting down ecoATM anytime soon.

[JayGatsby]

I would really like to see deep dive data on redbox consumers. Very specifically I'd like to see if there is a meaningful class of consumers that is stable or had a slower decline rate. I would love to see breakdowns according to geography, city/country, rich/poor neighbourhoods, dsl/cable availability.

 

Second to that I want more information of flexibility of the cost structure.

 

If there are any analysts who read this board and are attending tomo conference with the cfo please give him relentless questions on the composition of the redbox consumer.

Not sure I learned anything from this but it's interesting: http://www.digitalsmiths.com/downloads/Digitalsmiths_Q3_2015_Video_Trends_Report-Consumer_Behavior_Across_Pay-TV_VOD_PPV_OTT_Connected_Devices_and_Content_Discovery.pdf

 

Hard to rationalize ~25% volume declines. Q4 will be on par with Q3 which had almost no titles.

 

[TwoCitiesCapital]

I would really like to see deep dive data on redbox consumers. Very specifically I'd like to see if there is a meaningful class of consumers that is stable or had a slower decline rate. I would love to see breakdowns according to geography, city/country, rich/poor neighbourhoods, dsl/cable availability.

 

Second to that I want more information of flexibility of the cost structure.

 

If there are any analysts who read this board and are attending tomo conference with the cfo please give him relentless questions on the composition of the redbox consumer.

Not sure I learned anything from this but it's interesting: http://www.digitalsmiths.com/downloads/Digitalsmiths_Q3_2015_Video_Trends_Report-Consumer_Behavior_Across_Pay-TV_VOD_PPV_OTT_Connected_Devices_and_Content_Discovery.pdf

 

Hard to rationalize ~25% volume declines. Q4 will be on par with Q3 which had almost no titles.

 

If it truly is more important about the number of new titles as opposed to the number of blockbuster titles, then Q4 actually have about 25% fewer releases than Q3 did.

 

http://www.boxofficemojo.com/quarterly/?chart=byquarter&quarter=Q3&view=releasedate

[tooskinneejs]

If physical rentals of movies is likely to meet extinction at some point very far into the future, isn't the repurchase of any shares at any price a waste of shareholder value?

 

Repurchases in this case are, in essence, buying something with a long-term terminal value of $0.

 

That is what troubles me most about this situation.  If the cash was returned to existing shareholders via dividends, then even if this were a cigar butt you may still recover your investment with the FCF through the terminal date.  But using FCF to buy back stock doesn't reward existing shareholders when terminal value = $0.

 

By the way, really good, insightful, and substantive discussion by you guys on this one.  Really appreciate the quality of this discussion.

[JayGatsby]

If it truly is more important about the number of new titles as opposed to the number of blockbuster titles, then Q4 actually have about 25% fewer releases than Q3 did.

 

http://www.boxofficemojo.com/quarterly/?chart=byquarter&quarter=Q3&view=releasedate

What lag time are you assuming for time from box office to Redbox?

 

If physical rentals of movies is likely to meet extinction at some point very far into the future, isn't the repurchase of any shares at any price a waste of shareholder value?

 

Repurchases in this case are, in essence, buying something with a long-term terminal value of $0.

 

That is what troubles me most about this situation.  If the cash was returned to existing shareholders via dividends, then even if this were a cigar butt you may still recover your investment with the FCF through the terminal date.  But using FCF to buy back stock doesn't reward existing shareholders when terminal value = $0.

 

By the way, really good, insightful, and substantive discussion by you guys on this one.  Really appreciate the quality of this discussion.

You'd only invest if you think the shares are worth less than the discounted cash flow in the future. If you assume the cash builds in a pile, that pile is your terminal value. If you think there's $30/share in that pile you wouldn't invest. If you think there is $60/share in that pile and they can buy shares at $45 then it makes your share of that pile worth more than the original $60. Plus you'd pay less taxes.

[TwoCitiesCapital]

If it truly is more important about the number of new titles as opposed to the number of blockbuster titles, then Q4 actually have about 25% fewer releases than Q3 did.

 

http://www.boxofficemojo.com/quarterly/?chart=byquarter&quarter=Q3&view=releasedate

What lag time are you assuming for time from box office to Redbox?

 

If physical rentals of movies is likely to meet extinction at some point very far into the future, isn't the repurchase of any shares at any price a waste of shareholder value?

 

Repurchases in this case are, in essence, buying something with a long-term terminal value of $0.

 

That is what troubles me most about this situation.  If the cash was returned to existing shareholders via dividends, then even if this were a cigar butt you may still recover your investment with the FCF through the terminal date.  But using FCF to buy back stock doesn't reward existing shareholders when terminal value = $0.

 

By the way, really good, insightful, and substantive discussion by you guys on this one.  Really appreciate the quality of this discussion.

You'd only invest if you think the shares are worth less than the discounted cash flow in the future. If you assume the cash builds in a pile, that pile is your terminal value. If you think there's $30/share in that pile you wouldn't invest. If you think there is $60/share in that pile and they can buy shares at $45 then it makes your share of that pile worth more than the original $60. Plus you'd pay less taxes.

 

If we're not talking about blockbusters, there wouldn't be much lag. A lot of these films will pretty much go straight to DVD meaning Redbox would get them almost immediately. I mean how many of the 139 films that came out in Q4 went to theatres and stayed there for months? A fraction of them. You probably wouldn't need much of a lag.

 

It does seem strange that they wouldn't make much money on blockbusters, but some other poster here said that is what management said and it does seem odd that the % decline YOY and QOQ pretty much match up exactly with the % decline in titles released over those same periods...

 

As far as buybacks when terminal value is 0, terminal value isn't 0. Terminal value is Coinstar, ecoATM/Gazelle, etc.

[thefatbaboon]

Tooskin, I understand where you are coming from but I think you are mistaken in your thinking. Just because something has an ultimate value of zero does not mean that a share repurchase doesn't work.

For example, imagine it is a zero starting in 2020 but that the cash flow between today and 2019 is sufficient to buy everyone out except you and your one share that you bought today for 44. And imagine furthermore that during 2019 the company makes 20m and all of it is yours as the sole shareholder and you pay yourself a nice 20m dividend and get the local paper to write an article about what a prescient genius you were to make 20m out of 44! After which it goes to zero.  Obviously in this case although the ultimate value is zero you have benefited enormously from the share repurchase.

[KJP]

Tooskin, I understand where you are coming from but I think you are mistaken in your thinking. Just because something has an ultimate value of zero does not mean that a share repurchase doesn't work.

For example, imagine it is a zero starting in 2020 but that the cash flow between today and 2019 is sufficient to buy everyone out except you and your one share that you bought today for 44. And imagine furthermore that during 2019 the company makes 20m and all of it is yours as the sole shareholder and you pay yourself a nice 20m dividend and get the local paper to write an article about what a prescient genius you were to make 20m out of 44! After which it goes to zero.  Obviously in this case although the ultimate value is zero you have benefited enormously from the share repurchase.

 

That's nice in theory, but your proposed dividend payment would likely be a fraudulent conveyance/transfer and would be clawed back by creditors. 

[thefatbaboon]

Why?

[tooskinneejs]

Tooskin, I understand where you are coming from but I think you are mistaken in your thinking. Just because something has an ultimate value of zero does not mean that a share repurchase doesn't work.

For example, imagine it is a zero starting in 2020 but that the cash flow between today and 2019 is sufficient to buy everyone out except you and your one share that you bought today for 44. And imagine furthermore that during 2019 the company makes 20m and all of it is yours as the sole shareholder and you pay yourself a nice 20m dividend and get the local paper to write an article about what a prescient genius you were to make 20m out of 44! After which it goes to zero.  Obviously in this case although the ultimate value is zero you have benefited enormously from the share repurchase.

 

JayGatsby and Fatbaboon, that makes sense.  I guess then the real question is whether the expected future free cash flows will really exceed today's equity and debt amounts so that there is cash flow left over for the last shareholders still standing.  I've just seen so many cases where money is used for repurchases and, in hindsight, those repurchases turn out to be huge wastes of money.  I'm thinking Sears, RadioShack, etc.

[thefatbaboon]

Tooskin, that's it, that's the question we are all puzzling over!

[flesh]

If it truly is more important about the number of new titles as opposed to the number of blockbuster titles, then Q4 actually have about 25% fewer releases than Q3 did.

 

http://www.boxofficemojo.com/quarterly/?chart=byquarter&quarter=Q3&view=releasedate

What lag time are you assuming for time from box office to Redbox?

 

If physical rentals of movies is likely to meet extinction at some point very far into the future, isn't the repurchase of any shares at any price a waste of shareholder value?

 

Repurchases in this case are, in essence, buying something with a long-term terminal value of $0.

 

That is what troubles me most about this situation.  If the cash was returned to existing shareholders via dividends, then even if this were a cigar butt you may still recover your investment with the FCF through the terminal date.  But using FCF to buy back stock doesn't reward existing shareholders when terminal value = $0.

 

By the way, really good, insightful, and substantive discussion by you guys on this one.  Really appreciate the quality of this discussion.

You'd only invest if you think the shares are worth less than the discounted cash flow in the future. If you assume the cash builds in a pile, that pile is your terminal value. If you think there's $30/share in that pile you wouldn't invest. If you think there is $60/share in that pile and they can buy shares at $45 then it makes your share of that pile worth more than the original $60. Plus you'd pay less taxes.

 

If we're not talking about blockbusters, there wouldn't be much lag. A lot of these films will pretty much go straight to DVD meaning Redbox would get them almost immediately. I mean how many of the 139 films that came out in Q4 went to theatres and stayed there for months? A fraction of them. You probably wouldn't need much of a lag.

 

It does seem strange that they wouldn't make much money on blockbusters, but some other poster here said that is what management said and it does seem odd that the % decline YOY and QOQ pretty much match up exactly with the % decline in titles released over those same periods...

 

As far as buybacks when terminal value is 0, terminal value isn't 0. Terminal value is Coinstar, ecoATM/Gazelle, etc.

 

Average lag from box office to redbox rental is 3-4 months.

[TwoCitiesCapital]

If it truly is more important about the number of new titles as opposed to the number of blockbuster titles, then Q4 actually have about 25% fewer releases than Q3 did.

 

http://www.boxofficemojo.com/quarterly/?chart=byquarter&quarter=Q3&view=releasedate

What lag time are you assuming for time from box office to Redbox?

 

If physical rentals of movies is likely to meet extinction at some point very far into the future, isn't the repurchase of any shares at any price a waste of shareholder value?

 

Repurchases in this case are, in essence, buying something with a long-term terminal value of $0.

 

That is what troubles me most about this situation.  If the cash was returned to existing shareholders via dividends, then even if this were a cigar butt you may still recover your investment with the FCF through the terminal date.  But using FCF to buy back stock doesn't reward existing shareholders when terminal value = $0.

 

By the way, really good, insightful, and substantive discussion by you guys on this one.  Really appreciate the quality of this discussion.

You'd only invest if you think the shares are worth less than the discounted cash flow in the future. If you assume the cash builds in a pile, that pile is your terminal value. If you think there's $30/share in that pile you wouldn't invest. If you think there is $60/share in that pile and they can buy shares at $45 then it makes your share of that pile worth more than the original $60. Plus you'd pay less taxes.

 

If we're not talking about blockbusters, there wouldn't be much lag. A lot of these films will pretty much go straight to DVD meaning Redbox would get them almost immediately. I mean how many of the 139 films that came out in Q4 went to theatres and stayed there for months? A fraction of them. You probably wouldn't need much of a lag.

 

It does seem strange that they wouldn't make much money on blockbusters, but some other poster here said that is what management said and it does seem odd that the % decline YOY and QOQ pretty much match up exactly with the % decline in titles released over those same periods...

 

As far as buybacks when terminal value is 0, terminal value isn't 0. Terminal value is Coinstar, ecoATM/Gazelle, etc.

 

Average lag from box office to redbox rental is 3-4 months.

 

It depends on how successful the release and the studio. Some of these films will stay in the theater for a month and will be on Redbox within 30 days of being out of the theater. Perfect example: http://www.redbox.com/movies/backcountry Theatrical release was 9/8 and the first review on Redbox is in late November. Much shorter than 3 to 4 months and I'm sure there are others that are similar - that just happened to be the first "no name" one I located. If these are the movies that Redbox is really making it's money on, then not much of a lag is needed because they won't be in theaters long and the window for getting them on DVD moving out of theaters is probably 0-30 days.

[KJP]

Why?

 

In general, a dividend would be a fraudulent conveyance if it is paid while the company is insolvent or if paying the dividend would render the company insolvent.  When a company is insolvent is not always clear, but in your scenario creditors likely would seek to clawback both dividends and monies paid to repurchase shares.  This has happened and is currently happening to, for example, public shareholders who were bought out in LBOs that later went bust.  See, e.g., http://articles.chicagotribune.com/2013-12-13/business/ct-biz-1213-tribune-lawsuit-20131213_1_junior-creditors-bankruptcy-case-leveraged-buyout

 

For a discussion of fraudulent conveyances as applied to the related situation of a dividend recap, see here:  http://www.debevoise.com/insights/publications/2013/09/dividend-recaps-used-with-care-a-useful-tool

 

You also have "zone of insolvency" issues:  http://www.jonesday.com/delaware-supreme-court-limits-scope-of-zone/

 

The broader point is that you cannot reasonable expect managers to keep returning capital to shareholders while leaving creditors less than whole. 

[thefatbaboon]

What are you talking about?!

 

I was giving a hypothetical example to show how a share repurchase might work even with a trend toward zero long term value. I was not giving a hypothetical where there was all kinds of residual negative value for creditors or anyone else and the last shareholder just got lucky and squeezed out a check.

[KJP]

I'm talking about what happens in the real world when companies pay out massive amounts of money to equity holders while their share prices go to zero.  This is also the legal advice management's receive when faced with capital allocation decisions.  If that information is not relevant to you, ignore it.

[JayGatsby]

I've used this page before to try to measure vs release schedule / box office: http://www.ondvdreleases.com/rent-new-redbox-releases-october-2015/

 

Doesn't lead me to any good conclusions regarding the rate of decline. I'd like to think that there's no real reason for someone to be a Redbox customer today and not a Redbox customer next year, but I said that last year and Amazon has clearly been taking share: https://www.google.com/trends/explore#q=amazon%20video%2C%20redbox&cmpt=q&tz=Etc%2FGMT%2B7

 

Redbox has been a classic low-end disrupter of the cable movie rental business. Its ubiquitous kiosks offer a slender selection of movies on the old-fashioned DVD format, but the price is cheap and the service convenient for people who shop for groceries at least once a week.

 

Now the disrupter may be getting disrupted by an even cheaper alternative. Tiny and inexpensive online video devices like Google's (GOOGL) $35 Chromecast and Amazon's (AMZN) $40 Fire TV Stick are among the top sellers this holiday season (prices were even lower on Black Friday). The low-end devices provide easy access to cheap movies, both rentable recent releases from Amazon and Google's video services and all-you-can-eat style streaming of older flicks on Netflix, Amazon Prime Video, and other services.

[rishig]

Current numbers:

 

Shares outstanding: 17.275M

Share price: $42

Market cap: $725M

Debt: $825M

EV: $1.55B

 

Note even though the balance sheet says they have $195M in cash not all can be considered unencumbered.

 

"A portion of our business involves collecting and processing large volumes of cash, most of it in the form of coins. As of September 30, 2015 , our cash and cash equivalent balance was $195.6 million , of which $73.6 million was identified for settling our accrued payable to our retailer partners in relation to our Coinstar kiosks. The remaining balance of our cash and cash equivalents was available for use to support our liquidity needs."

 

As per the Q3 10Q, net debt is $818M. See "net debt and net leverage ratio" section. I rounded it to $825, just to simplify the math.

 

2015 Guidance:

FCF: $235M - $255M

Interest: $40M

Unlevered FCF: $275M - $295M

EV / Unlevered FCF: 5.0 - 5.5x

 

Absolute Best case:

- Redbox melts away in 4 years and FCF stays flat until on last day of year 4 it goes to 0.

- Total FCF produced in 4 years is $255M (best case for 2015) x 4 = $1040M.

- Management uses every dollar to buy back stock at say $40.

- So, management buys back the entire company + pays off 315M in debt.

- That leaves with $510M in debt for Coinstar that produces about $90M in unlevered free cash flow.

- At $510 EV and ending $90M in unlevered free cash flow, you still have a 5.5x multiple for a no growth business.

- May be Coinstar is here to forever, and it deserves a 7-8x multiple (i.e. you are willing to own Coinstar for a 12% yield).

- Am I willing to bet on the absolute best case?

- Short anything above, how is this cheap?

[flesh]

Current numbers:

 

Shares outstanding: 17.275M

Share price: $42

Market cap: $725M

Debt: $825M

EV: $1.55B

 

Note even though the balance sheet says they have $195M in cash not all can be considered unencumbered.

 

"A portion of our business involves collecting and processing large volumes of cash, most of it in the form of coins. As of September 30, 2015 , our cash and cash equivalent balance was $195.6 million , of which $73.6 million was identified for settling our accrued payable to our retailer partners in relation to our Coinstar kiosks. The remaining balance of our cash and cash equivalents was available for use to support our liquidity needs."

 

As per the Q3 10Q, net debt is $818M. See "net debt and net leverage ratio" section. I rounded it to $825, just to simplify the math.

 

2015 Guidance:

FCF: $235M - $255M

Interest: $40M

Unlevered FCF: $275M - $295M

EV / Unlevered FCF: 5.0 - 5.5x

 

Absolute Best case:

- Redbox melts away in 4 years and FCF stays flat until on last day of year 4 it goes to 0.

- Total FCF produced in 4 years is $255M (best case for 2015) x 4 = $1040M.

- Management uses every dollar to buy back stock at say $40.

- So, management buys back the entire company + pays off 315M in debt.

- That leaves with $510M in debt for Coinstar that produces about $90M in unlevered free cash flow.

- At $510 EV and ending $90M in unlevered free cash flow, you still have a 5.5x multiple for a no growth business.

- May be Coinstar is here to forever, and it deserves a 7-8x multiple (i.e. you are willing to own Coinstar for a 12% yield).

- Am I willing to bet on the absolute best case?

- Short anything above, how is this cheap?

 

Just depends on what you believe the rate of decline is. Zero cash flow for redbox four years out seems more worst case than best, if it was at 50m/year fcf 4 years out everything looks much different. I understand you kept fcf constant for the next four years just making a point.

 

If you model 15%/year fcf decline at redbox then the thesis depends on at what price shares are being bought back at. Personally, I think the ceo manufactured this decline. He saw what happened to the share price when the previous ceo left early 15' and moved some costs for next qtr to this qtr to make fcf lower. His incentive of course is that he can buyback at lower prices and this is likely the surest way for him to be successful.

[rishig]

Current numbers:

 

Shares outstanding: 17.275M

Share price: $42

Market cap: $725M

Debt: $825M

EV: $1.55B

 

Note even though the balance sheet says they have $195M in cash not all can be considered unencumbered.

 

"A portion of our business involves collecting and processing large volumes of cash, most of it in the form of coins. As of September 30, 2015 , our cash and cash equivalent balance was $195.6 million , of which $73.6 million was identified for settling our accrued payable to our retailer partners in relation to our Coinstar kiosks. The remaining balance of our cash and cash equivalents was available for use to support our liquidity needs."

 

As per the Q3 10Q, net debt is $818M. See "net debt and net leverage ratio" section. I rounded it to $825, just to simplify the math.

 

2015 Guidance:

FCF: $235M - $255M

Interest: $40M

Unlevered FCF: $275M - $295M

EV / Unlevered FCF: 5.0 - 5.5x

 

Absolute Best case:

- Redbox melts away in 4 years and FCF stays flat until on last day of year 4 it goes to 0.

- Total FCF produced in 4 years is $255M (best case for 2015) x 4 = $1040M.

- Management uses every dollar to buy back stock at say $40.

- So, management buys back the entire company + pays off 315M in debt.

- That leaves with $510M in debt for Coinstar that produces about $90M in unlevered free cash flow.

- At $510 EV and ending $90M in unlevered free cash flow, you still have a 5.5x multiple for a no growth business.

- May be Coinstar is here to forever, and it deserves a 7-8x multiple (i.e. you are willing to own Coinstar for a 12% yield).

- Am I willing to bet on the absolute best case?

- Short anything above, how is this cheap?

 

Just depends on what you believe the rate of decline is. Zero cash flow for redbox four years out seems more worst case than best, if it was at 50m/year fcf 4 years out everything looks much different. I understand you kept fcf constant for the next four years just making a point.

 

If you model 15%/year fcf decline at redbox then the thesis depends on at what price shares are being bought back at. Personally, I think the ceo manufactured this decline. He saw what happened to the share price when the previous ceo left early 15' and moved some costs for next qtr to this qtr to make fcf lower. His incentive of course is that he can buyback at lower prices and this is likely the surest way for him to be successful.

 

Does anyone really know what the rate of decline is going to be? Also, remember that revenue decline % and operating profit % are not linear. Operating deleverage kicks in at some point and all operating profit disappears. See ARO as an example of how things can turn south very quickly and it didn't even have any debt.