OUTR - Outerwall

[TwoCitiesCapital]

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.

 

I think it just depends on the reason for the decline. I was expecting more than 250M FCF this year and next year. If that had happened, that would have reduced your leverage multiples by more than a full turn if my projections had come to pass. The question has now become more iffy - if the rate of decline is simply due to the box-office (which q-o-q and y-o-y figures are very similar to those of the box office titles), then this lower-than-expected FCF isn't a result of secular decline and it was just a bad quarter which doesn't really change my thesis/terminal value much because next year could actually be better. They were on track to do $275M if you annualized 9-month figures so it's very possible that Q4 is just a real bad quarter. There's also the potential that over the next 4 years you see an exceptioal quarter or two that tacks on an additional $50M randomly each time which reduces your end-multiple by 0.5x every time it happens. 

 

Also, we're looking at international growth potential for Coinstar. Maybe 5x a stable business in a slow secular decline is mediocre. 5x for a business that has the ability to grow FCF at a respectable rate isn't...

 

So, when you're buying OUTR you're thinking a few things will happen.

 

1) Redbox makes more money before death than people expect

    a. Redbox sticks around for longer than most think OR

    b. The decline in FCF doesn't accelerate as quickly as people expect over a time frame of decline that is roughly correct (because the last users are likely to be the stickiest)

    c. Even at $250M, we'd still be making more FCF than last year- though it's not the $300+ than many may have hoped for

 

2) Capital Allocation that prioritizes buybacks at attractive levels maximizes the potential value of Coinstar to current owners

    a. The expected value gained from increasing terminal % ownership of Redbox FCF has to be greater than value gained from paying down debt and reinvesting

    b. The lower the share price goes - the more likely this becomes, but the outcome is inherently uncertain

    c. Share repurchases increase the distribution of possible outcomes - to the downside if you're wrong and to the upside if you're right

 

I have considered that the CEOs purposefully sandbag results and expectations previously. Maybe they are, maybe they aren't. I don't know if it's safe to assume that and admitting it would ruin the intended result of such actions. You just have to feel your way around that. I don't necessarily think that they keep ecoATM around to hold the stock price down, but it is a possibility. I think it's more likely that they simply choose to surprise the market with these bad announcements and sandbag forward looking expectations and that's about the only stock price managing they do.

 

I think this quarter and the next one will be illuminating and will really sway the thesis one way or another. I'm not comfortable buying here though because this could be the first few chips in a flawed thesis OR it could just be noise and the thesis is sound. It's pointless to pay too much attention to a single quarters guidance....

 

 

[rishig]

The question has now become more iffy - if the rate of decline is simply due to the box-office (which q-o-q and y-o-y figures are very similar to those of the box office titles), then this lower-than-expected FCF isn't a result of secular decline and it was just a bad quarter which doesn't really change my thesis/terminal value much because next year could actually be better.

 

The question is always of this nature in businesses like this:

(1) If I look at ARO, when the stock was at $20, there were similar questions - is SSS down due to bad inventory management, bad weather, seasonal, etc or due to a permanent decline?

(2) I saw similar rates of decline projections at that time, but when you look in hindsight, you see that revenue decline was not that bad, but operating deleverage killed all profits.

 

Are these things even knowable - if the business of renting DVDs at a store is in permanent decline? Imagine if you had the ability to sample a large percentage of RedBox's customers today and get their response about their preference of renting a DVD for $1.5 - $2 at RedBox vs. watching it on streaming for $6, and a large % of them said yes - we love RedBox - just don't like the movies released this year. Does this mean that these preferences cannot changes 1-2-3 years down?

 

What if movie studios think that they want to change how they release DVDs. They want to juice the amount of money they make on streaming movies. They could move the DVD release window around. They could first release the stream for $6 and then 3 months later release the DVD. Well, in that case, RedBox is out of luck. The customers that are more sensitive to release schedules would leave RedBox for streaming and pay up the $6. I don't know how likely the scenario is, but the media industry (specifically experimenting with release windows) is changing quite rapidly.

 

(3) On Coinstar, this is a very old business. Suddenly after so many years of being in this business, it is going to start growing. I am always skeptical when you take a US concept and export it internationally. Ask the retailers on how successful they have been at this. Lastly, this doesn't happen for free. It costs money.

[SnarkyPuppy]

The problem I have with Mecham's calculation is the substantial debt burden historically and currently.  They have ~872mm on their debt schedule within the recent Q and they have a history of financing buybacks/principal repayments with more debt. 

 

I've tried to redo his scenario, but this time factoring in principal debt repayments.   

 

Let's assume the following:

- 20% declines in Redbox FCF going forward

- 75mm FCF Coinstar going forward

- 0 FCF going forward for anything else

- 'Venture' capex as follows:  2016-2018: 50mm.  2019: 40mm.  2020: 30mm.  2021: 20mm.  2022: 10mm.

 

That provides the following Total FCF going forward as follows:

 

2016-201

2017-166

2018-138

2019-125

2020-117

2021-113

2022-111

2023-112

2024-105

2025-99

2026-94 (assume redbox ends here)

2027-75 (coinstar FCF only)

 

Assume all debt is due 2019 (ex- explictly stated 2021 debt) = 576

Assume remaining debt due 2021 (unsecured seniors due in 2021) = 296

 

FCF goes to paying down "2019 debt" in 2016-2018 and remaining goes to "2021 debt" during 2019-2020.

 

Debt free in 2021. 

FCF total is 113 divided by estimated 12.4 shares outstanding (residual fcf in years 2016-2020 post-debt paydown goes to buybacks at $50 per share) = $9 per share FCF.  3X multiple (current trading mutliple) = $27.

 

At this point, 2021, they can fund share buybacks in full. 

 

Assuming all FCF goes to buybacks until redbox ends in 2026, shares outstanding in 2027 is .48mm.  FCF from coinstar $75 divided by .48mm = $156mm FCF per share in 2026.

 

Why not hold off from buying this until they prove they can allocate capital efficiently (pay down debt) and then buy? 

 

I'm actually torn on this and posted my thought process for criticism/to foster a discussion.  Seems cheap at $40 per share and 50% short squeeze catalyst.  But I don't see a huge margin of safety.

 

 

 

 

 

[feynmanresearch]

Our take on Outerwall:http://seekingalpha.com/article/3749976-outerwall-has-even-more-downside-than-most-bulls-think]seekingalpha.com/article/3749976-outerwall-has-even-more-downside-than-most-bulls-think]http://seekingalpha.com/article/3749976-outerwall-has-even-more-downside-than-most-bulls-think

[SnarkyPuppy]

Our take on Outerwall:http://seekingalpha.com/article/3749976-outerwall-has-even-more-downside-than-most-bulls-think

 

It sounds like you start off bearish and transition to bullish at the midpoint of the article.  Honestly.  I may not be confidently long but I would absolutely never short this stock

[flesh]

The problem I have with Mecham's calculation is the substantial debt burden historically and currently.  They have ~872mm on their debt schedule within the recent Q and they have a history of financing buybacks/principal repayments with more debt. 

 

I've tried to redo his scenario, but this time factoring in principal debt repayments.   

 

Let's assume the following:

- 20% declines in Redbox FCF going forward

- 75mm FCF Coinstar going forward

- 0 FCF going forward for anything else

- 'Venture' capex as follows:  2016-2018: 50mm.  2019: 40mm.  2020: 30mm.  2021: 20mm.  2022: 10mm.

 

That provides the following Total FCF going forward as follows:

 

2016-201

2017-166

2018-138

2019-125

2020-117

2021-113

2022-111

2023-112

2024-105

2025-99

2026-94 (assume redbox ends here)

2027-75 (coinstar FCF only)

 

Assume all debt is due 2019 (ex- explictly stated 2021 debt) = 576

Assume remaining debt due 2021 (unsecured seniors due in 2021) = 296

 

FCF goes to paying down "2019 debt" in 2016-2018 and remaining goes to "2021 debt" during 2019-2020.

 

Debt free in 2021. 

FCF total is 113 divided by estimated 12.4 shares outstanding (residual fcf in years 2016-2020 post-debt paydown goes to buybacks at $50 per share) = $9 per share FCF.  3X multiple (current trading mutliple) = $27.

 

At this point, 2021, they can fund share buybacks in full. 

 

Assuming all FCF goes to buybacks until redbox ends in 2026, shares outstanding in 2027 is .48mm.  FCF from coinstar $75 divided by .48mm = $156mm FCF per share in 2026.

 

Why not hold off from buying this until they prove they can allocate capital efficiently (pay down debt) and then buy? 

 

I'm actually torn on this and posted my thought process for criticism/to foster a discussion.  Seems cheap at $40 per share and 50% short squeeze catalyst.  But I don't see a huge margin of safety.

 

-20% declines seems high, we've seen that this year however this is the price increase year.

-add some small value after 2026 ie 10m fcf/year for redbox

-venture capex looks high

-refi the debt when due and model 10-30% of fcf going to debt forever.

[SnarkyPuppy]

The problem I have with Mecham's calculation is the substantial debt burden historically and currently.  They have ~872mm on their debt schedule within the recent Q and they have a history of financing buybacks/principal repayments with more debt. 

 

I've tried to redo his scenario, but this time factoring in principal debt repayments.   

 

Let's assume the following:

- 20% declines in Redbox FCF going forward

- 75mm FCF Coinstar going forward

- 0 FCF going forward for anything else

- 'Venture' capex as follows:  2016-2018: 50mm.  2019: 40mm.  2020: 30mm.  2021: 20mm.  2022: 10mm.

 

That provides the following Total FCF going forward as follows:

 

2016-201

2017-166

2018-138

2019-125

2020-117

2021-113

2022-111

2023-112

2024-105

2025-99

2026-94 (assume redbox ends here)

2027-75 (coinstar FCF only)

 

Assume all debt is due 2019 (ex- explictly stated 2021 debt) = 576

Assume remaining debt due 2021 (unsecured seniors due in 2021) = 296

 

FCF goes to paying down "2019 debt" in 2016-2018 and remaining goes to "2021 debt" during 2019-2020.

 

Debt free in 2021. 

FCF total is 113 divided by estimated 12.4 shares outstanding (residual fcf in years 2016-2020 post-debt paydown goes to buybacks at $50 per share) = $9 per share FCF.  3X multiple (current trading mutliple) = $27.

 

At this point, 2021, they can fund share buybacks in full. 

 

Assuming all FCF goes to buybacks until redbox ends in 2026, shares outstanding in 2027 is .48mm.  FCF from coinstar $75 divided by .48mm = $156mm FCF per share in 2026.

 

Why not hold off from buying this until they prove they can allocate capital efficiently (pay down debt) and then buy? 

 

I'm actually torn on this and posted my thought process for criticism/to foster a discussion.  Seems cheap at $40 per share and 50% short squeeze catalyst.  But I don't see a huge margin of safety.

 

-20% declines seems high, we've seen that this year however this is the price increase year.

-add some small value after 2026 ie 10m fcf/year for redbox

-venture capex looks high

-refi the debt when due and model 10-30% of fcf going to debt forever.

 

Agree with you on items 1-3, but those estimates are extra conservative as that it's the only way I can add some margin of safety to the calcs. 

 

I'm not sure I'd be happy with them refinancing over and over again.  Eventually they need to return FCF to us and ongoing debt burden reduces their ability to do so

[ratiman]

You guys are like degens betting on when Outerwall will die. If it's less than four years, stay away. If more, invest. It's a 50/50 proposition, who knows really. It's true that 50/50 propositions are fascinating. That's what sports betting is for. But as an investor, you might want to stay away from situations where risk and reward are pretty even and time is working against you.

[AzCactus]

Doesn't 4 years seem a bit arbitrary? Why not 5 or 6? 

[thefatbaboon]

Just one mans opinion who has been wrong so far but I have looked at the "x years and dead"  in an effort to calculate a worst case. My "bet" is actually on there being a residual redbox business that lives for quite a long time. (Plus coinstar which is less controversial) Obviously smaller than the +30m consumers who currently use redbox but still a meaningful amount.

[ratiman]

Why not two? Chromecast works great and I've never seen anyone at the two Redbox machines at my supermarket.

 

Compare Outerwall and IDT. Each runs businesses in terminal decline, DVDs and long distance calling. IDT has a large cash position and is making investments, Outerwall has a large debt burden. IDT is like a cheap call option (I don't own IDT, but use it for comparison), Outerwall is like selling a put. In general you're better off betting a little to make a lot than the converse. 

[actuary]

For those saying that Redbox will see negative operating leverage, could you please share a little more color on your thinking?

 

2014 Redbox product costs were over $800 million. Why wouldn't product costs be mostly variable on rentals, especially if they are doing some basic kiosk optimization?

 

Has anyone figured out what they spend in interchange? Considering Galen Smith's comment that 80% of transactions are debit, shouldn't interchange be something like $50 million per year? With the fixed piece of interchange, wouldn't that be pretty variable on units as well?

 

What else is in op ex? Retailers fees... aren't those mostly variable on revenue? Minimum annual revenue share commitments for Redbox as disclosed in the 2014 10K are only ~$3 million.

 

It seems to my quick look that a large majority of the Redbox expenses are variable and a lot of that is even variable on units rather than revenue.

 

So if they take the obvious strategy of dripping price into this business (through probably not +25% at a time) and making basic operational improvements, where is all the negative leverage?

 

Side note -- I also don't understand why the worst case scenario needs to assume you can't refi some debt given the stability of the Coinstar cash flow?

 

 

 

[flesh]

For those saying that Redbox will see negative operating leverage, could you please share a little more color on your thinking?

 

2014 Redbox product costs were over $800 million. Why wouldn't product costs be mostly variable on rentals, especially if they are doing some basic kiosk optimization?

 

Has anyone figured out what they spend in interchange? Considering Galen Smith's comment that 80% of transactions are debit, shouldn't interchange be something like $50 million per year? With the fixed piece of interchange, wouldn't that be pretty variable on units as well?

 

What else is in op ex? Retailers fees... aren't those mostly variable on revenue? Minimum annual revenue share commitments for Redbox as disclosed in the 2014 10K are only ~$3 million.

 

It seems to my quick look that a large majority of the Redbox expenses are variable and a lot of that is even variable on units rather than revenue.

 

So if they take the obvious strategy of dripping price into this business (through probably not +25% at a time) and making basic operational improvements, where is all the negative leverage?

 

Side note -- I also don't understand why the worst case scenario needs to assume you can't refi some debt given the stability of the Coinstar cash flow?

 

+1

 

-I see very little if any negative leverage. Redbox is a "ham sandwich' business at this point. I suspect we'll see price increases shortly after prime/vod raises prices in the future. Perhaps every few years. 

 

-There's no reason they can't refi unless there's a catastrophic decline.

 

-Because they can refi, this changes DJ's analysis about when we will see share

prices appreciate, there's no benefit to waiting, unless of course you see greater than 15% declines forever in redbox and or coinstar.

 

-I loved the short article recommending a 1% position, shows how confident they are at this point. Basically the guy was processing why he's come to the conclusion that his short thesis is done and secretly hoping for one last leg down before he's out.

 

I own shares and call options at current prices.

 

 

 

-

 

 

[SnarkyPuppy]

For those saying that Redbox will see negative operating leverage, could you please share a little more color on your thinking?

 

2014 Redbox product costs were over $800 million. Why wouldn't product costs be mostly variable on rentals, especially if they are doing some basic kiosk optimization?

 

Has anyone figured out what they spend in interchange? Considering Galen Smith's comment that 80% of transactions are debit, shouldn't interchange be something like $50 million per year? With the fixed piece of interchange, wouldn't that be pretty variable on units as well?

 

What else is in op ex? Retailers fees... aren't those mostly variable on revenue? Minimum annual revenue share commitments for Redbox as disclosed in the 2014 10K are only ~$3 million.

 

It seems to my quick look that a large majority of the Redbox expenses are variable and a lot of that is even variable on units rather than revenue.

 

So if they take the obvious strategy of dripping price into this business (through probably not +25% at a time) and making basic operational improvements, where is all the negative leverage?

 

Side note -- I also don't understand why the worst case scenario needs to assume you can't refi some debt given the stability of the Coinstar cash flow?

 

+1

 

-I see very little if any negative leverage. Redbox is a "ham sandwich' business at this point. I suspect we'll see price increases shortly after prime/vod raises prices in the future. Perhaps every few years. 

 

-There's no reason they can't refi unless there's a catastrophic decline.

 

-Because they can refi, this changes DJ's analysis about when we will see share

prices appreciate, there's no benefit to waiting, unless of course you see greater than 15% declines forever in redbox and or coinstar.

 

-I loved the short article recommending a 1% position, shows how confident they are at this point. Basically the guy was processing why he's come to the conclusion that his short thesis is done and secretly hoping for one last leg down before he's out.

 

I own shares and call options at current prices.

 

 

 

-

 

I actually agree with your points.  I still struggle:

 

- I think I'm getting some false comfort in that the short reports I've read have all been terrible.  The long thesis has been better articulated in terms of granularity and rationale for upside, whereas the short thesis has almost consistently been high level "lol netflix" arguments.  Just because the shorts don't have a great argument doesn't mean there's enough margin of safety for a long position.

 

- I haven't been able to figure out what has caused declines in FCF.  It could be that they've forever lost some of there customer base or it could be that the box office had a shitty period of releases.  I am not confident one way or the other and am struggling to find the unit level data to prove either.  If FCF does indeed decrease 15% per annum going forward, I do not feel there is enough upside to warrant a buy given their debt load.   

 

- What competitive advantage does Coinstar have that will allow them to continue to make 75mm FCF going forward without fail?  Seems like a very easy business to recreate if its so very profitible.  I also just don't know enough about this business, and at some point the future the longs will increasingly become more reliant on this.

 

- I have no confidence in managements ability to allocate capital efficiently for us going forward.  They've continuously refinanced to buy back shares/issue dividends/paydown other debt.  If they continue to add debt and redbox continues to decline, I see some risk that I can't wrap my head around.  It also wouldn't be totally shocking if they spent some of the FCF on more so-so investments.

 

- I don't disagree that it's probably cheap and that there's probably some upside here.  The 50% short float provides a huge catalyst for a short-medium term upside which is why I own a small position.  I generally only hold a few positions with high conviction, so for me this doesn't fit my strategy which is more of a "punch card" approach going forward. 

 

I definitely could be wrong. 

[ratiman]

Is the competitor Netflix? I can never find any movies on Netflix, it's mostly tv shows. It looks from Google trends like the competitor is services like Chromecast.

 

https://www.google.com/trends/explore#q=redbox%2C%20chromecast&geo=US&cmpt=q&tz=Etc%2FGMT%2B5

[Guest roark33]

For those saying that Redbox will see negative operating leverage, could you please share a little more color on your thinking?

 

2014 Redbox product costs were over $800 million. Why wouldn't product costs be mostly variable on rentals, especially if they are doing some basic kiosk optimization?

 

Has anyone figured out what they spend in interchange? Considering Galen Smith's comment that 80% of transactions are debit, shouldn't interchange be something like $50 million per year? With the fixed piece of interchange, wouldn't that be pretty variable on units as well?

 

What else is in op ex? Retailers fees... aren't those mostly variable on revenue? Minimum annual revenue share commitments for Redbox as disclosed in the 2014 10K are only ~$3 million.

 

It seems to my quick look that a large majority of the Redbox expenses are variable and a lot of that is even variable on units rather than revenue.

 

So if they take the obvious strategy of dripping price into this business (through probably not +25% at a time) and making basic operational improvements, where is all the negative leverage?

 

Side note -- I also don't understand why the worst case scenario needs to assume you can't refi some debt given the stability of the Coinstar cash flow?

 

+1

 

-I see very little if any negative leverage. Redbox is a "ham sandwich' business at this point. I suspect we'll see price increases shortly after prime/vod raises prices in the future. Perhaps every few years. 

 

-There's no reason they can't refi unless there's a catastrophic decline.

 

-Because they can refi, this changes DJ's analysis about when we will see share

prices appreciate, there's no benefit to waiting, unless of course you see greater than 15% declines forever in redbox and or coinstar.

 

-I loved the short article recommending a 1% position, shows how confident they are at this point. Basically the guy was processing why he's come to the conclusion that his short thesis is done and secretly hoping for one last leg down before he's out.

 

I own shares and call options at current prices.

 

 

 

-

 

I actually agree with your points.  I still struggle:

 

- I think I'm getting some false comfort in that the short reports I've read have all been terrible.  The long thesis has been better articulated in terms of granularity and rationale for upside, whereas the short thesis has almost consistently been high level "lol netflix" arguments.  Just because the shorts don't have a great argument doesn't mean there's enough margin of safety for a long position.

 

- I haven't been able to figure out what has caused declines in FCF.  It could be that they've forever lost some of there customer base or it could be that the box office had a shitty period of releases.  I am not confident one way or the other and am struggling to find the unit level data to prove either.  If FCF does indeed decrease 15% per annum going forward, I do not feel there is enough upside to warrant a buy given their debt load.   

 

- What competitive advantage does Coinstar have that will allow them to continue to make 75mm FCF going forward without fail?  Seems like a very easy business to recreate if its so very profitible.  I also just don't know enough about this business, and at some point the future the longs will increasingly become more reliant on this.

 

- I have no confidence in managements ability to allocate capital efficiently for us going forward.  They've continuously refinanced to buy back shares/issue dividends/paydown other debt.  If they continue to add debt and redbox continues to decline, I see some risk that I can't wrap my head around.  It also wouldn't be totally shocking if they spent some of the FCF on more so-so investments.

 

- I don't disagree that it's probably cheap and that there's probably some upside here.  The 50% short float provides a huge catalyst for a short-medium term upside which is why I own a small position.  I generally only hold a few positions with high conviction, so for me this doesn't fit my strategy which is more of a "punch card" approach going forward. 

 

I definitely could be wrong.

 

The best "short" thesis isn't a real short case, but instead an opportunity cost question.  Why try to time your purchase of a melting ice cube when it is undervalued and then sell when it becomes fairly valued or overvalued.  Your timing decision will always be in question and the ability of time that inevitably benefits a good business will never help OUTR.  In other words, the short thesis is take your money elsewhere or leave it in cash until you can by a business that will be around in 10 years at a favorable price. 

[Travis Wiedower]

- What competitive advantage does Coinstar have that will allow them to continue to make 75mm FCF going forward without fail?  Seems like a very easy business to recreate if its so very profitible.  I also just don't know enough about this business, and at some point the future the longs will increasingly become more reliant on this.

 

I'd be shocked if another competitor entered this space on a national scale. Mainly because the coin exchange business is a melting ice cube, albeit at a much slower pace than Redbox. Long-term I don't see much reason to have physical money, but even if it does persist coins should decrease in use as electronic payments grow. Also, Coinstar already has relationships in place with most of the big retailers (Wal-Mart, Walgreens, Kroger, Target, etc) and there's no reason to have two competing coin kiosks in the same retailer. A new competitor would have a very tough time gaining critical mass against Coinstar.

[flesh]

Sure hope they used some of that 200m+ cash hoard on buybacks today. 100m at todays prices would change sentiment pretty quick.

[Picasso]

Let's say they used up all the cash and now you have 12 million shares outstanding.  How is that going to change sentiment?  In a couple years you're probably looking at 12x earnings again.  Why pay $40 today for something worth 12x earnings in a couple years? 

 

You know what will change sentiment really quick?  Showing higher returns on invested capital and less elasticity around price hikes at Redbox.  They can buyback shares until they're blue in the face and it isn't going to change sentiment.  The long-term returns will be built around how well they navigate the next several years, not how many shares they buyback.

 

By the way, Outerwall bonds of 2021 traded down to 79.5 on low volume and yield around 11%.  If this continues you can just buy some Outerwall bonds at mid-teen yields versus owning a dubious piece of the equity.  There is a price not very far from here where I think the returns are better than the equity and your risk is a lot less.

[Guest roark33]

The other thing I have noticed in a lot of melting ice cube type investments is that mgmt becomes even more nervous buying shares as the stock declines dramatically.  This is even more true if there is debt.  I think there are obvious psychological reasons why, but it is something that I have seen time and time again. 

[ratiman]

As it declines, equity becomes a smaller fraction of the EV. So might as well buy back debt first.

[BTShine]

See WTW for an example of declining FCF and debt buybacks instead of equity.  They used to buy back stock, but not any more

[TwoCitiesCapital]

As it declines, equity becomes a smaller fraction of the EV. So might as well buy back debt first.

 

What does it matter what the fractional size of EV is? What should matter is how much value you get for each $1 spent on purchases. There is certainly a point where buying back debt would make sense, but the lower the stock price goes, the further we get from that point.

[valueyoda]

Share repurchases are foolish for melting icecubes. There have been so many examples over the years where that strategy has proven to be wrong. Special dividends and debt buybacks make more sense.

[ratiman]

As it declines, equity becomes a smaller fraction of the EV. So might as well buy back debt first.

 

What does it matter what the fractional size of EV is? What should matter is how much value you get for each $1 spent on purchases. There is certainly a point where buying back debt would make sense, but the lower the stock price goes, the further we get from that point.

 

That's true, if the company is undervalued.