OUTR - Outerwall

[valueyoda]

Exactly, and that is where it always goes wrong with value traps. That is why buybacks at Autozone have been a homerun while buybacks at Sears, J.C. Penney, Gamestop, IBM etc have been busts so far.

 

I have been short for a while, and wouldn't be suprised if this stock trades under $10 in a few years, probably together with Gamestop.

[JayGatsby]

Seems like the question is how much people value price over convenience. Obviously streaming (Amazon, Google play, apple) is the easiest. If a good chunk of their customers are using it to save money the shares are undervalued. If their customers are using it because they haven't bought a chromecast yet it is overvalued. Not sure we know the answer to that yet. I see people using the boxes; $400M of quarterly revenue requires a lot of renters though. 

 

With the bonds in the 80s they may choose to draw the revolver to take some out. If they can take out the debt at a discount with cheaper debt that could delever faster.

 

I bought a Chromebook and it comes with a free movie rental. Amazon and google are both being pretty aggressive with freebies so don't know if that's a temporary impact of if those customers get lost to Redbox forever.

 

I continue to believe Redbox's inventorying is part of the problem. Star Wars 4 - 6 are generating good revenue for others now but Redbox doesn't carry them. I have a hard time believing that putting 1 copy of Star Wars in a box has a negative ROI.  Their marketing strategy also seems pretty weak. I liked them on facebook and never see ads from them. I get that on a $1.50 rental it doesn't make sense to spend too much on advertising but a period "hey we're alive and still the cheapest option to see X" would be nice to see.

[rsmehta]

Exactly, and that is where it always goes wrong with value traps. That is why buybacks at Autozone have been a homerun while buybacks at Sears, J.C. Penney, Gamestop, IBM etc have been busts so far.

 

I have been short for a while, and wouldn't be suprised if this stock trades under $10 in a few years, probably together with Gamestop.

 

Sears, JC Penney, Gamestop all have huge retail overheads, plus staffing costs.

 

What is the average rental cost of having a Redbox kiosk?? What is the monthly maintenance cost per kiosk? Totally different businesses.

 

IBM has fared alright(hasn't destroyed huge shareholder value)

 

 

[mcliu]

Exactly, and that is where it always goes wrong with value traps. That is why buybacks at Autozone have been a homerun while buybacks at Sears, J.C. Penney, Gamestop, IBM etc have been busts so far.

 

I have been short for a while, and wouldn't be suprised if this stock trades under $10 in a few years, probably together with Gamestop.

 

What kind of cash flows are you assuming to get to $10?

[siddharth18]

Interesting...this guy puts the "fair value" of OUTR at $10 too - http://www.gurufocus.com/news/378207/redbox-owner-outerwall-is-a-falling-knife

[JayGatsby]

Interesting...this guy puts the "fair value" of OUTR at $10 too - http://www.gurufocus.com/news/378207/redbox-owner-outerwall-is-a-falling-knife

"The problem lies in the business model. Redbox, the company’s top service, could be in permanent decline and it may only be a matter of time until the company’s cash flow will not be able to support the dividend."

Huh? The $16M of annual dividends?

[SnarkyPuppy]

Interesting...this guy puts the "fair value" of OUTR at $10 too - http://www.gurufocus.com/news/378207/redbox-owner-outerwall-is-a-falling-knife

 

The more short reports I read, the more compelled I am to buy.

[Travis Wiedower]

Interesting...this guy puts the "fair value" of OUTR at $10 too - http://www.gurufocus.com/news/378207/redbox-owner-outerwall-is-a-falling-knife

 

I have no position but if this was the only evidence I had of the short thesis I think I'd be a buyer, not a shorter. He rambles some of the most obvious, high-level points about the company for a few paragraphs and then slaps a $10/share value on it out of nowhere with zero financials to back it up.

[SnarkyPuppy]

Interesting...this guy puts the "fair value" of OUTR at $10 too - http://www.gurufocus.com/news/378207/redbox-owner-outerwall-is-a-falling-knife

 

I have no position but if this was the only evidence I had of the short thesis I think I'd be a buyer, not a shorter. He rambles some of the most obvious, high-level points about the company for a few paragraphs and then slaps a $10/share value on it out of nowhere with zero financials to back it up.

 

I've read every short report that I can find.  Every single one is like this.  My own hesitations regarding capital allocation are the reason I have not bought - but if it was a matter of choosing the Long vs Short thesis outstanding on the internets, there's no question the Longs have a better argument

[JayGatsby]

My own hesitations regarding capital allocation are the reason I have not bought - but if it was a matter of choosing the Long vs Short thesis outstanding on the internets, there's no question the Longs have a better argument

I'm actually less concerned about that given the actions of the new CEO so far:

- Appointing himself as head of Redbox (and getting rid of the expensive guy who wasn't doing anything) makes it clear that his primary focus is to cash flow Redbox

- Decision to shut down and stop the losses at SampleIt. Old management couldn't shut anything down

- Gazelle purchase made sense to me at a pretty low price ($16M, net of inventory), although only time will tell

 

Offset is Redbox trends are worse than I'd hoped. There's a lot of discounting by Google and Amazon to capture market share currently plus my prior complaint that Redbox inventorying is terrible. How do they not have star wars 4-6?

[TwoCitiesCapital]

My own hesitations regarding capital allocation are the reason I have not bought - but if it was a matter of choosing the Long vs Short thesis outstanding on the internets, there's no question the Longs have a better argument

I'm actually less concerned about that given the actions of the new CEO so far:

- Appointing himself as head of Redbox (and getting rid of the expensive guy who wasn't doing anything) makes it clear that his primary focus is to cash flow Redbox

- Decision to shut down and stop the losses at SampleIt. Old management couldn't shut anything down

- Gazelle purchase made sense to me at a pretty low price ($16M, net of inventory), although only time will tell

 

Offset is Redbox trends are worse than I'd hoped. There's a lot of discounting by Google and Amazon to capture market share currently plus my prior complaint that Redbox inventorying is terrible. How do they not have star wars 4-6?

 

I think the problem with Redbox acquiring older DVDs to market to the season/newest fad is that they may not make the money back on them. You can get SW ep. 4 dvds for $10-15 online. That means redbox has to rent each copy 6-10x just to break even on the cost of the dvd. Maybe another 1-2x to cover the cost of distribution. That's a single copy at each kiosk that has to turnover 8-12x in a month or two building up to the Star Wars release and slightly beyond.

 

I kind of agree with you on the seasonal items: Elf could be reused year in and year out and so it wouldn't be so hard to make that 8-12x turnover, but Star Wars seems like a much less certainty of profit.

[menlo]

Any thoughts on the debt?  There's a 6% 3/15/19 CUSIP: 690070AA5 priced around $94, YTM of 8+%.  There's a 2021 issue outstanding, too.

 

I'm sure the dividend is designed to make it expensive for the shorts to hold, but it can be cut/stopped, if necessary.

 

Can the melting ice cube last long enough to cover the payments...?

 

[JayGatsby]

My own hesitations regarding capital allocation are the reason I have not bought - but if it was a matter of choosing the Long vs Short thesis outstanding on the internets, there's no question the Longs have a better argument

I'm actually less concerned about that given the actions of the new CEO so far:

- Appointing himself as head of Redbox (and getting rid of the expensive guy who wasn't doing anything) makes it clear that his primary focus is to cash flow Redbox

- Decision to shut down and stop the losses at SampleIt. Old management couldn't shut anything down

- Gazelle purchase made sense to me at a pretty low price ($16M, net of inventory), although only time will tell

 

Offset is Redbox trends are worse than I'd hoped. There's a lot of discounting by Google and Amazon to capture market share currently plus my prior complaint that Redbox inventorying is terrible. How do they not have star wars 4-6?

 

I think the problem with Redbox acquiring older DVDs to market to the season/newest fad is that they may not make the money back on them. You can get SW ep. 4 dvds for $10-15 online. That means redbox has to rent each copy 6-10x just to break even on the cost of the dvd. Maybe another 1-2x to cover the cost of distribution. That's a single copy at each kiosk that has to turnover 8-12x in a month or two building up to the Star Wars release and slightly beyond.

 

I kind of agree with you on the seasonal items: Elf could be reused year in and year out and so it wouldn't be so hard to make that 8-12x turnover, but Star Wars seems like a much less certainty of profit.

I guess you're right because there must be some reason they aren't doing it. Seems too basic for them to just have completely missed. I disagree on the math though. Current average revenue per rental is ~$2.95, so if it costs them $12 including distribution that's 4 rentals to breakeven. They should be able to hit both the theatrical release and the DVD release windows. They're renting/selling better on itunes than a lot of movies that Redbox currently has in stock.

[SnarkyPuppy]

Starting to get attractive in the mid 30s...

[Libs]

The 12 months will probably be decisive for OUTR. Thinking about a small Jan 2017 65 call position.

[frommi]

The 12 months will probably be decisive for OUTR. Thinking about a small Jan 2017 65 call position.

 

So you expect the stock to appreciate more than 50% in one year? I know better ways to piss money away. :)

[JayGatsby]

The math I was running this morning is if coinstar is stable and eco is worth $0, the market is assuming ~20% declines per year for Redbox. That seems to be inline with actual results from Q3 and Q4. There should be some group of Redbox users that truly appreciate the offering for price, Blu-Ray, etc. I just don't know how big that percentage is.

[DTEJD1997]

My own hesitations regarding capital allocation are the reason I have not bought - but if it was a matter of choosing the Long vs Short thesis outstanding on the internets, there's no question the Longs have a better argument

I'm actually less concerned about that given the actions of the new CEO so far:

- Appointing himself as head of Redbox (and getting rid of the expensive guy who wasn't doing anything) makes it clear that his primary focus is to cash flow Redbox

- Decision to shut down and stop the losses at SampleIt. Old management couldn't shut anything down

- Gazelle purchase made sense to me at a pretty low price ($16M, net of inventory), although only time will tell

 

Offset is Redbox trends are worse than I'd hoped. There's a lot of discounting by Google and Amazon to capture market share currently plus my prior complaint that Redbox inventorying is terrible. How do they not have star wars 4-6?

 

I think the problem with Redbox acquiring older DVDs to market to the season/newest fad is that they may not make the money back on them. You can get SW ep. 4 dvds for $10-15 online. That means redbox has to rent each copy 6-10x just to break even on the cost of the dvd. Maybe another 1-2x to cover the cost of distribution. That's a single copy at each kiosk that has to turnover 8-12x in a month or two building up to the Star Wars release and slightly beyond.

 

I kind of agree with you on the seasonal items: Elf could be reused year in and year out and so it wouldn't be so hard to make that 8-12x turnover, but Star Wars seems like a much less certainty of profit.

I guess you're right because there must be some reason they aren't doing it. Seems too basic for them to just have completely missed. I disagree on the math though. Current average revenue per rental is ~$2.95, so if it costs them $12 including distribution that's 4 rentals to breakeven. They should be able to hit both the theatrical release and the DVD release windows. They're renting/selling better on itunes than a lot of movies that Redbox currently has in stock.

One thing that has been missing from this particular sub-thread is that there are two ways there may be residual value to the Star Wars DVD's...

 

A). After breaking even on the rental, could the used ones be sold on Ebay for $5 a piece?  Or maybe bundle 3 for $20?

 

B). Could these be re-rented when the 2nd Star Wars movie comes out in the future?  The next one is supposed to come out in May 2016. Might there not be interest for a few months in renting earlier releases when this movie comes out?

 

Thus, these movies might have more value than what is currently perceived.

 

Any thoughts?

[JayGatsby]

One thing that has been missing from this particular sub-thread is that there are two ways there may be residual value to the Star Wars DVD's...

 

A). After breaking even on the rental, could the used ones be sold on Ebay for $5 a piece?  Or maybe bundle 3 for $20?

 

B). Could these be re-rented when the 2nd Star Wars movie comes out in the future?  The next one is supposed to come out in May 2016. Might there not be interest for a few months in renting earlier releases when this movie comes out?

 

Thus, these movies might have more value than what is currently perceived.

 

Any thoughts?

It seems like there are some movies that pay to keep in the box at all times. Star Wars may be in that bucket. I remember going to Blockbuster and when there were no good new releases on the wall you'd go to the middle and find a classic (usually cheaper than new releases). If each box holds 700 movies and new release volume per box is in decline, there is now space to hold more classics. As new release revenue declines, the ability to generate more revenue from old movies becomes incrementally more important

[flesh]

According to boxofficemojo.com I found this somewhat interesting.

 

More than 2m in box office - top 10 =

2013-174 releases

2014-178

2015-167

 

More than 1m in box office - top 10=

 

2013-206

2014-205

2015-198

 

If we assign a 5% decline because of fewer yoy releases, what % decline do we assign to price increases? In my direct mail marketing biz I once tested a 8.95 price point versus 9.95 doing an a/b split test (everything is the same except price and mailing lists are split in half) on 150k mailpieces (75k each) and the extra dollar caused the response rate to decline 20%.  If we can get to a 12% fcf/year decline for outr as a whole, the investment works very well at these prices.

 

 

[JayGatsby]

According to boxofficemojo.com I found this somewhat interesting.

 

More than 2m in box office - top 10 =

2013-174 releases

2014-178

2015-167

 

More than 1m in box office - top 10=

 

2013-206

2014-205

2015-198

 

If we assign a 5% decline because of fewer yoy releases, what % decline do we assign to price increases? In my direct mail marketing biz I once tested a 8.95 price point versus 9.95 doing an a/b split test (everything is the same except price and mailing lists are split in half) on 150k mailpieces (75k each) and the extra dollar caused the response rate to decline 20%.  If we can get to a 12% fcf/year decline for outr as a whole, the investment works very well at these prices.

Interesting. I think you have to segregate coinstar and Redbox. I think Coinstar's EBITDA at some point will start to decline (fewer cash transactions, inability to continue to raise price), but it's pretty much an annuity. If the Redbox price increases worked properly they should have seen a decrease in volume but an increase in EBITDA. That seemed to hold true in Q1 - Q3.

 

This is interesting: http://finance.yahoo.com/news/cord-cutting-spreading-fromtv-to-internet-service-163154653.html . Not sure how much of an impact it has, but can't be a bad thing. Read an interesting article a while back on how people are spending more than ever on  data subscriptions mainly because every family member has a cell phone with data plan. If 1/3rd of the country doesn't have broadband that's a pretty large addressable market of cost-conscious consumers.

 

Side note, but does anyone know how the cash breaks down? I haven't been able to find the right footnote. At end of Q3 they had $195.6M of cash. $73.6M of that was in coinstar boxes, and $33.9M was held in domestic financial institutions. So where's the other $88M? Seems odd for them to keep that much excess cash at Coinstar UK.

[widenthemoat]

So I've recently been doing some high level thinking on Redbox and was hoping someone could poke some holes in my theory. I think we all can agree that at the moment Netflix is not truly a competitor when it comes to viewing new releases. If that is truly the case then generally speaking the only reason that DVDs would "die" would be due to increased competition from VOD services such as Apple TV or Amazon Video. My response is that cable providers have had their "On Demand" service since around 2003. On Demand is pretty damn convenient if you have cable and I would argue that if you can afford an Apple TV you probably currently have or very recently have had cable. If anything Apple TV is making rentals more costly...its main appeal is the ability to watch Netflix on your big screen tv. So if the Apple TV's of the world are not anymore convenient then On Demand, and do not offer a lower price point then On Demand, then what is causing the "physical rentals are going to fall off a cliff" mindset in the investment community? If someone chose to use Redbox for the past 10 years instead of On Demand what makes people so confident that they are now switching over to Apple TVs even though they aren't able to offer prices any lower then On Demand?

[JayGatsby]

So I've recently been doing some high level thinking on Redbox and was hoping someone could poke some holes in my theory. I think we all can agree that at the moment Netflix is not truly a competitor when it comes to viewing new releases. If that is truly the case then generally speaking the only reason that DVDs would "die" would be due to increased competition from VOD services such as Apple TV or Amazon Video. My response is that cable providers have had their "On Demand" service since around 2003. On Demand is pretty damn convenient if you have cable and I would argue that if you can afford an Apple TV you probably currently have or very recently have had cable. If anything Apple TV is making rentals more costly...its main appeal is the ability to watch Netflix on your big screen tv. So if the Apple TV's of the world are not anymore convenient then On Demand, and do not offer a lower price point then On Demand, then what is causing the "physical rentals are going to fall off a cliff" mindset in the investment community? If someone chose to use Redbox for the past 10 years instead of On Demand what makes people so confident that they are now switching over to Apple TVs even though they aren't able to offer prices any lower then On Demand?

I agree with you and picked up more today. I do think there's a few risks that will impact the business but I also don't expect the fall off a cliff scenario:

1. The cheap content of Netflix, Hulu Amazon prime has created alternatives if your goal is to consume content and not necessarily to watch a specific movie. My mother, for example, is a perfect Redbox customer (frugal, not great with technology), but I've seen her consumer a higher percentage of content through Amazon Prime because it's free and easy.

2. DVD players aren't included in computers anymore. Whatever % of Redbox's rentals were watched on computers have or will likely switch to streaming. DVD players also eventually break (although they have a pretty long shelf life) and people will have to spend money to reup.

 

I'm hoping that there's a bit of a new and cool aspect to the kindle fire stick, etc that causes people to rent movies. They were maybe the most popular items this holiday season. I got a Roku as a gift and bought a chromebook for myself and both came with a coupon for a free rental. My hope is that most people who get one of those devices rents a few movies to try it, but ultimately votes for the cheaper option of Redbox. I didn't realize this before, but with Redbox's loyalty program the 11th movie is free so really you're paying $1.35 a night.

 

Current market cap is somewhere around ~$550M after Q4 share repurchases. At $250M of FCF that's a monster yield. At 2x leverage the risk is only that fall off the cliff scenario that you describe. While definitely not a 0% risk I just don't see what causes that.

 

Other risk is that Q4 results would say we're dead wrong.

 

[flesh]

I'm modeling a 15% a year fcf decline for redbox 16-18' and 25%/yr thereafter. For coinstar 10% yr decline 16-18 then 20%/yr thereafter.

 

Using 64% fcf to buybacks, 6% divi, 5% misc, 25% debt.

 

This gets me to around a 10%/yr return, next 6 yrs, including divi, w an exit multiple of 5x fcf.

 

That being said, if the declines I'm using in the model for 16-18 happen to be true, its likely at some point others will stop discounting such a fast drop off and you may get out with a much better price.

 

Anyways, having a hard time getting psyched here. I suppose its a decent margin of safety if my numbers prove to conservative.

[JayGatsby]

I think even after the drop you have to believe there's a sustainable business model at some level in at least one of the businesses to invest. If you think they're both gone in 5-10 years there isn't a high enough margin of safety given you can't predict how quickly the boxes will turn into pumpkins.