OUTR - Outerwall

[Guest Grey512]

I don't track JRW closely and care about Arlington more than I care about JRW.

And I get what you're saying.

I'm just trying to discourage ascribing too much weight to Mecham / Arlington or whomever.

The guy is adulated and seems to be watched very closely. Some of his more recent moves are head-scratchers for me, though. 

[AzCactus]

I don't track JRW closely and care about Arlington more than I care about JRW.

And I get what you're saying.

I'm just trying to discourage ascribing too much weight to Mecham / Arlington or whomever.

The guy is adulated and seems to be watched very closely. Some of his more recent moves are head-scratchers for me, though.

 

Fair enough.  No need to derail the thread and talk just about him.  Either way we'll see what happens. 

[AzCactus]

Mr. Market is throwing Outerwall against the wall. 

[SnarkyPuppy]

http://ir.outerwall.com/investors/news-and-events/financial-news/news-releases-details/2016/Outerwall-Inc-Announces-2015-Fourth-Quarter-And-Full-Year-Results/default.aspx

 

FY15 Figures:

-$248MM FCF for FY15 total company

-Net Debt:  $845mm  ("Opportunistically repurchased $41.1 million in face value of the company's 5.875% Senior Notes due 2021 in the fourth quarter")

-"During the fourth quarter of 2015, the company repurchased 673,821 shares of common stock at an average price per share of $53.89."

 

Guidance for FY16:

-$140-190mm FCF total company

-"Managing the Redbox business for profitability and cash flow in the face of an estimated 15% to 20% decline in rentals from secular decline"

-"Weighted average diluted shares outstanding(2) (in millions) 16.29 — 16.35"

 

 

[KCLarkin]

Mecham's 2014 thesis:

 

"Even assuming FCF declines 12% per annum at Redbox..."

 

At the high end of guidance, you are looking at a 24% decline in consolidated FCF. At this point, you have to admit the thesis was wrong. Given the debt, there is a real possibility that they buyback shares right to the brink of bankruptcy.

 

--

Disclosure: no position. I haven't modelled this one so I could be wrong. But if you are planning to let this one ride because "Arlington owns it", you should at least look at the ZINC thread to understand the risks and the potential behavioural mistakes.

[flesh]

I was watching to see if dvd volume rental declined yoy due to lapping the price increase which was included in 1 of 3 months in 4q 14'. It didn't decelerate, it accelerated and guidance is dismal, I'm out of my 3% position after hours at 28.60.

 

Thankfully I was pretty negative on this one and trimmed my position to a tiny one, honestly, I would have been out before if Arlington didn't own it.

 

Gotta trust yourself!

[Picasso]

Yeesh, those are two phrases one doesn't want to see in a press release.  "Opportunistically repurchase" and "secular decline."  Too bad they weren't that "opportunistic" with their share repurchases.  They repeatedly top ticked and wasted a ton of shareholder capital.

 

This is going down to the teens.

[Guest Grey512]

The FCF guidance now basically says that the current quarter run-rate FCF ($160m i.e. $40m x 4) is 'the new normal'. That's below the LTM of $240m.

 

 

[rsmehta]

Well when you are on a board full of contrarians.......

 

    Silver lining anyone?

[Guest Grey512]

Well when you are on a board full of contrarians.......

 

    Silver lining anyone?

 

Silver lining is that the price will drop and possibly still overshoot to the downside.

[flesh]

I don't think there is a silver lining. If you assume guidance for fcf and decline rate for redbox is correct, I see no value in the equity. IMO, you have to assume the decline rate accelerates sooner or later.

 

I should say that I believe coinstar's volume decline will accelerate in my model and others don't see it this way.

[JayGatsby]

Mecham's 2014 thesis:

 

"Even assuming FCF declines 12% per annum at Redbox..."

 

At the high end of guidance, you are looking at a 24% decline in consolidated FCF. At this point, you have to admit the thesis was wrong. Given the debt, there is a real possibility that they buyback shares right to the brink of bankruptcy.

 

--

Disclosure: no position. I haven't modelled this one so I could be wrong. But if you are planning to let this one ride because "Arlington owns it", you should at least look at the ZINC thread to understand the risks and the potential behavioural mistakes.

1. You're right that FCF is declining faster than he underwrote.

2. I don't understand the argument that they'll buy back shares until they go bankrupt. They've stated they intend to stay ~2x LTM levered. In Q4 they repurchased debt. They aren't just repurchasing shares.

 

EBITDA guidance would imply the operating leverage of Redbox is a lot worse than anticipated. If you assume Eco is $0 of EBITDA that would imply a ~30% decline in Redbox EBITDA? I thought "All Other" was SampleIt, so that should be 0?

 

[TwoCitiesCapital]

:/ Womp Womp

 

What a disaster! Guidance of 140MM-190MM! Way below the 200-250M I was expecting to continue for 2015 and 2016 before really starting to decline.

 

Also, I am really disappointed in their execution of this buyback - average prices are always extremely high in the trading range for the quarter. I sold my position in favor of options recently. Looks like that wasn't too bad of an idea if it's a bloodbath tomorrow (like I imagine it will be).

 

Glad this was a smaller position for me and that I had been opportunistic enough to sell half at $80 a while back.

[Picasso]

If it goes down to 20 like Picasso says then I hope the company uses 340m to repurchase everyone's shares but mine.  They have a 600m credit line that only had 55 drawn as of q3.

 

This is a fascinating investment. I must admit It hasn't gone as I planned at any point. I didn't like the price increase taken after 3 bad quarters last December. It seemed like bad strategy. You should raise when you have a good product and people are "in the habit". I didn't like the Eco saga and the ex ceo saga. I was disappointed with the cost structure flexibility ytd. And now this screw up.

 

And yet every time I step away and re look I feel the investment case is always re-saved by fewer and cheaper shares. maybe I'm crazy.

 

Now as for redbox health one aspect of the announcement that I found slightly reassuring. Revenue is missing expectations by only 2-3%. So they spent promotional $ and that has halved fcf expectations but it did at least bring people to the kiosks.

 

I'd be willing to bet you (now that we're in the $20's) the company stops repurchasing shares soon.  At this point most of the free cash will go to debt repayment.  When will equity holders see a return?  Dividend will be yielding 8% soon, so you'll at least see something until that stops as well.

 

To some extent I could see the shares take a real beating (beyond what we've already seen) if Arlington is out of the stock when the 13F comes out.  With so much short interest it might be like SHLD where you can buy it for a short squeeze every once in while as it ends up trading between 1-3x rapidly declining FCF.

[AzCactus]

My idea of Arlington using this as his version of Berkshire Hathaway is appearing more plausible as the price continues to crater.  He takes it over, invests the cash as he sees fit and 40 years from now Outerwall is a collection of solid businesses (not including Coinstar and Redbox).

[valueinvestingideas]

My idea of Arlington using this as his version of Berkshire Hathaway is appearing more plausible as the price continues to crater.  He takes it over, invests the cash as he sees fit and 40 years from now Outerwall is a collection of solid businesses (not including Coinstar and Redbox).

 

[fareastwarriors]

My idea of Arlington using this as his version of Berkshire Hathaway is appearing more plausible as the price continues to crater.  He takes it over, invests the cash as he sees fit and 40 years from now Outerwall is a collection of solid businesses (not including Coinstar and Redbox).

 

 

ahhahhahaha

[KCLarkin]

I don't understand the argument that they'll buy back shares until they go bankrupt. They've stated they intend to stay ~2x LTM levered. In Q4 they repurchased debt. They aren't just repurchasing shares.

 

You and nine friends have discovered a sunken pirate ship. You borrow $1M to launch an expedition and retrieve the treasure.

 

You find the ship and the treasure. On your first trip down, you bring back $100k. You guess that the total treasure is worth $2M, so the net will be $1M. You give your first partner $100k to buy back his (net) share of the treasure. Each time you go down, you bring back $100k and buy off your remaining partners.

 

In the end, you have:

1 share (owning all remaining treasure and debt)

$1M in debt

A pile of treasure (that you think is worth $1.1M)

 

So there are three possible outcomes:

A - Your initial estimate of the treasure was exactly right (and your share is worth $100K just like your partners)

B - Your initial estimate was low (say the remaining treasure is $1.2 M, then your share is $200k - double your partners)

C - Your initial estimate was high (say the remaining treasure is worth $900k, then your share is worthless)

 

--

This is a simplified version of the OUTR thesis. If you think the stock is undervalued (and you're right), the buybacks will create value for those that don't sell.

 

But if you are wrong, there is a very real chance of a $0 (because all of the value went to the people who got bought out at $85 or $60 or ...).

 

--

You can't trust this management to only do buybacks when the stock is undervalued. They are going to pay out 75%+ regardless. So you need to be very confident in your valuation AND you need to be right.

 

--

Given these dynamics, you need to do your own work. DO NOT RELY on "Guru X" endorsement. DO NOT RELY on management statements. Make sure the margin of safety is very large.

 

 

[JayGatsby]

You can't trust this management to only do buybacks when the stock is undervalued. They are going to pay out 75%+ regardless. So you need to be very confident in your valuation AND you need to be right.

Your example assumes 100% of FCF goes to share repurchases, which was my point. They've said every quarter that they intend to return 75% to 100% of cash to shareholders and stay between 1.75x and 2.25x trailing EBITDA. This quarter they added "...and senior note repurchases" to the 75% to 100% line. A fair argument could be made that the pile of treasure is worth less than the debt and the equity is worthless, but the risk that they only use cash to fund repurchases is counter to what they've said and done.

 

With the accelerated decline they seem to have shifted their strategy from repurchasing equity to repurchasing debt. The discount on the debt gives them some advantages here as well. I've been wrong in my investment thesis but I can't fault management's capital allocation. Only part I'm skeptical of is the continued investment into ecoATM (and their unwillingness to carry Elf  :P, but that's more operational).

[Picasso]

A little diddy by Allen Mecham (as he gets ready to turn this into his Berkshire Hathaway):

 

Look, if you had, one shot, or one opportunity

To seize everything you ever wanted. In one moment

Would you capture it, or just let it slip?

Yo

 

His palms are sweaty, knees weak, arms are heavy

There's vomit on his sweater already, mom's spaghetti

He's nervous, but on the surface he looks calm and ready to drop bombs,

But he keeps on forgetting what he wrote down,

The whole CoBF crowd goes so loud

He opens his mouth, but the words won't come out

He's choking how, everybody's joking now

The clock's run out, time's up, over, blaow!

Snap back to reality. Oh, there goes gravity

Oh, there goes Allen, he choked

He's so mad, but he won't give up that

Easy, no

He won't have it, he knows his whole back's to these ropes

It don't matter, he's dope

He knows that but he's broke

He's so sad that he knows

When he goes back to his mobile home, that's when it's

Back to the lab again, yo

This whole rhapsody

He better go capture this moment and hope it don't pass him

 

[Hook:]

You better lose yourself in the value, the moment

You own it, you better never let it go (go)

You only get one shot, do not miss your chance to blow

This opportunity comes once in a lifetime (yo)

You better lose yourself in the value, the moment

You own it, you better never let it go (go)

You only get one shot, do not miss your chance to blow

This opportunity comes once in a lifetime (yo)

(You better)

 

[Hook]

 

You can do anything you set your mind to, man

[Jurgis]

Those are fighting words man.  8)

[randomep]

 

People, its only 9% of Arlington's capital, it won't break the fund!

 

 

[Tim Eriksen]

The big concern obviously is how fast EBITDA declines. 

 

                          2015          2016 Guidance

EBITDA            $485 MM    $340 - $380 MM

FCF                  $248 MM    $140 - $190 MM

Net Debt          $846 MM

Debt/EBITDA      1.74x

 

If net debt to EBITDA is targeted to be between 1.75 and 2.25 that would mean targeted net debt levels of between $630 and $810 million using a midpoint $360 million of EBITDA.  If they try to stay near 1.75x they have to use ALL the free cash flow for debt repayments.  If 2017 has further EBITDA decline the same could hold true again.  They have $350 million coming due in 2019, plus another $90 million on the term loan.  It may not be easy to roll that over.  Even if they can it won't be at 6%, and lenders are going to ask for stricter covenants.

 

It wouldn't surprise me if there are little to no share repurchases this year unless the business hits the high end of guidance.  Even then it may only result in 1 million shares.

 

[JayGatsby]

The big concern obviously is how fast EBITDA declines. 

 

                          2015          2016 Guidance

EBITDA            $485 MM    $340 - $380 MM

FCF                  $248 MM    $140 - $190 MM

Net Debt          $846 MM

Debt/EBITDA      1.74x

That's where I'm struggling as well. Here's the numbers I was playing with to try to back into their numbers:

 

                    2015:                          2016

Redbox:      $399                            259 (35% decline)

Cstar:            122                              116 (5% decline) 

Eco              -25                                -10 (At some point they either hit their forecast or end it)

Other            -13                                0 (I thought this was SampleIt)

Corp            -17                                -18

Stock Comp  +17                            12

Total            482 (close enough)        360 (Middle of range)

 

Non-Redbox assumptions may be a bit off but probably not by much. I haven't read anything yet that would indicate they're forecasting material declines at cstar. Eco they've guided to breakeven. Just seems like a massive EBITDA decline in Redbox if you're forecasting 15 - 20% revenue declines and the olympics. It's even more if you were to assume a more normalized EBITDA at Q4 for Redbox if they hadn't messed up inventory (EBITDA in Q4 was nearly $30M lower than Q3 despite higher revenue).

 

[thefatbaboon]

Jay,

I'm probably nuts...but redbox ebitda declining around 30 % in a 15% rental decline environment makes sense to me. 

 

And you'll definitely think I'm crazy now but I'm quite confident we'll do ok with this pig. Not what I had hoped to be sure! But I think there will be price hikes in a year or so, and again two years after that. And 15-20% declines throughout. Still, we'll get about 700m in fcf over next 5 years to shrink float, retire debt and pay div. say 300 to debt (850>500 assuming current discounts), 200 to div and 200 to stock (16>10m assuming current prices).  At the end of which I reckon there will be a much smaller core redbox with a slower decline rate that operates for the poor and Internet lacking. And a perfectly decent coinstar business.

 

So in 2021. 120 ebitda for coin, 80 ebitda for red. At 7 times ebitda for coin and 5 times for residual red (like a newspaper). That's circa 840m plus 400m. And 500m in debt leaves 740m for shareholders with 10m shares and having picked up 200m dividends along the way. I see about $90 in value for the guy holding from today through 2021.