OUTR - Outerwall

[actuary]

Nice pirate ship analogy. Would seem slightly more appropriate to say you think the treasure is worth 3, lenders and partners think it is worth 2. Based on recent dives, you now think it is worth less than 3... but partners and lenders expect less for their stakes as well.

 

So December/4Q looks like it was better than their forecast at the pre-announcement, right? FCF at upper end of range, core EBITDA better than top end, revs above top end, Redbox revs near top end. At least we saw a sequential increase in Redbox vols for 4Q vs 3Q, and the yoy was about the same.

 

On the conf call, they basically tipped their hand for price increases. As we lap them, it sounds like they are learning that they mistook secular decline for elasticity. In that case, they need to take pricing aggressively. If they keep running -25% vols but take pricing to 1.95 this year, 2.50 next, 2.95 next...

 

So 2015 didn't go as expected, but I find it funny to compare the final results to the original guidance from a year ago. Feb 2015 guidance was for 2015 core EBITDA of 467-512 and FCF of 205-245. Ok, so capex was lower than originally anticipated... but in the end they found levers to hit EBITDA and top FCF. And that was without taking any unexpected pricing in 2015 after that guidance.

 

We have to watch what mgmt does, not what they say. They have not received yearly options/RSUs yet and had no incentive to come out with strong guidance yesterday that would pop the stock ahead of that. I agree it is difficult to back into their sandbagged guidance. But it was the right thing to provide from the perspective of capital allocators who know the returns depend on low stock/bond prices right now.

 

 

[frommi]

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.

 

Maybe i repeat myself, but I don`t think its a good idea to calculate with a static decline rate. Declines normally accelerate to the downside, so maybe Redbox is not profitable any more in 2 or 3 years. Its much easier and safer to invest in a business that will likely be operational 20-30 years from now.

[Picasso]

I notice the same patterns play over again and again on this board.  Investors are way too slow to react when it's clear the thesis has broken down.  They try and find any little excuse or reason to say the business results aren't that bad.

 

A lot of you ladies and gents must love lighting your capital on fire.  You'd think thread after thread on VRX or ZINC or SHLD would start to drive the point home but alas you're a stubborn bunch.  All these stable 2021 free cash flow estimates are garbage.  The company flat out said their business is in secular decline and it's only accelerated.  They even told you they won't have enough excess free cash to repurchase shares sometimes this year or next year.  The only thing propping up the stock at all is the short interest.  There isn't enough volume for the shorts to cover their positions otherwise it'd probably be down 50% right now.

[nafregnum]

Just an idle thought...

 

It'd be cool if Mecham's 13F comes out on the 15th showing he sold out while it was back in the 40s.  I don't know why, but this little part of me is hoping he did, just like he sold out of BAC in the previous 13F and BAC dropped 25% since then. 

 

I still root for Mecham.  He is one of my favorite stories: A guy who doesn't attract too much attention to himself, sitting and reading printed material, coming up with investment ideas far from the noise.  I think it's got so much of "the investor's dream" in it.  So similar to the Warren Buffett story. 

 

In his defense, it sounded in his comments last year like this was his most uncomfortable position.  I should read that to mean "Get out now" much like I took WEBs own comments about BRK in last year's letter as a hint that "It's likely to go down this year".

 

Maybe I'm suffering from "Stock"holm syndrome  :o

 

 

[nafregnum]

I notice the same patterns play over again and again on this board.  Investors are way too slow to react when it's clear the thesis has broken down.  They try and find any little excuse or reason to say the business results aren't that bad.

 

A lot of you ladies and gents must love lighting your capital on fire.  You'd think thread after thread on VRX or ZINC or SHLD would start to drive the point home but alas you're a stubborn bunch.

 

...

 

The only thing propping up the stock at all is the short interest.  There isn't enough volume for the shorts to cover their positions otherwise it'd probably be down 50% right now.

 

Even after saying my bit for Mecham, I'm totally with you here Picasso.  And I love the quote "You guys most love lighting your capital on fire."  You're a good Munger.

 

I should've gotten out earlier.  Question I'm grappling with now is: Get out right right this minute or wait a few days?  How do you guys play it smart when you're trying to exit after you realize you were wrong?  You seem to be saying the short covering is propping the price up today, and it can be expected to drop more tomorrow. 

[thefatbaboon]

You're always very confident in what you write and at least in that sense you suit your handle well. not sure I think you should lump in vrx zinc and shld with outr. They have no similarities. Shld is money losing. Zinc never even had a a business just an idea. Valeant was a loftily valued platform roll up. Outerwall is a steady state coin business and a declining dvd rental business with significant fcf.  I don't think it unreasonable to look out 5 years and hazard that coin ebitda is the same and to put some small residual value on redbox. There were more than half a billion DVDs rented at redbox last year by 30 to 40 million people. It's declining and declining faster than we thought. But it's not going to vanish in two years.

youre of course free to think that outerwall is the same as zinc or shld. Personally, I think there is money to be made in outerwall at this price and added today.

[JayGatsby]

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.

I guess you're right that it's not an impossible figure. If there's minimal room to reduce opex a 15-20% decline in revenue would get to a 30-40% decline in EBITDA. Part of my thesis was the boxes didn't have the traditional retail footprint so they'd be able to better manage.

 

I agree with you there's a tail business, but I'm not sure I can say with any confidence how big it is.

 

I'm not sure management is right that the price increases have been accretive. Maybe they were for 2015 but the decline clearly accelerated after that so I guess it's a question of the lifetime value of the customers lost. I use Redbox because it's cheap and fairly convenient. At $2 I'd probably just stream. What bothers me is they don't give any explanations for customer behavior, making me think they just don't know / haven't cared to find out.

 

 

[Picasso]

The point isn't that this stock is like ZINC or VRX or "name your CoBF blowup here" in the literal business sense, but rather that the thesis has broken down and investors are too slow to admit it.  It's probably a natural response to losing money in a position but being able to take a loss and move on is part of what distinguishes a good investor from a bad investor. 

 

Also if you think I'm overconfident in what I write, then check out my previous posts on this thread and CSTR.  I'm not just coming in here at 52-week lows and yelling fire into a crowded room.  I'm just hoping some of you guys take a more disciplined approach to killing your thesis and moving on.  It doesn't matter to me if you don't but you all seem like nice guys and someone should tell you when the train is jumping off the tracks.

[randomep]

They even told you they won't have enough excess free cash to repurchase shares sometimes this year or next year.  The only thing propping up the stock at all is the short interest.  There isn't enough volume for the shorts to cover their positions otherwise it'd probably be down 50% right now.

 

huh? if shorts cover the positions the stock would go up..... what do you mean ???

[premfan]

Hi guys,

 

I actually was the original starter of the former coinstar thread many years ago. That said, I got out when jana took a stake and when my thesis was wrong for the company. Back in the day I actually thought this was a growth company trading at a reasonable price. I thought ecoatm/rubi was a novel idea and they had other ventures/startups in the works.  I haven't been following the company so I don't know the business progress or lack of progress. But, when they shut down there ventures business I decided my thesis was wrong.

 

I do think being intellectually honest is key in investing. I took my largest loss last year ever with energold drilling at 45 percent loss when I sold at 1.55. Because management kept making stupid moves. I couldn't tolerate it anymore and I decided I was wrong about the company.

 

Shifting gears. Stick with a thesis you have and if the facts change make a choice. There is no right or wrong choice. Its just having a strong opinion and conviction then making a move.

[JayGatsby]

Hi guys,

 

I actually was the original starter of the former coinstar thread many years ago. That said, I got out when jana took a stake and when my thesis was wrong for the company. Back in the day I actually thought this was a growth company trading at a reasonable price. I thought ecoatm/rubi was a novel idea and they had other ventures/startups in the works.  I haven't been following the company so I don't know the business progress or lack of progress. But, when they shut down there ventures business I decided my thesis was wrong.

 

I do think being intellectually honest is key in investing. I took my largest loss last year ever with energold drilling at 45 percent loss when I sold at 1.55. Because management kept making stupid moves. I couldn't tolerate it anymore and I decided I was wrong about the company.

 

Shifting gears. Stick with a thesis you have and if the facts change make a choice. There is no right or wrong choice. Its just having a strong opinion and conviction then making a move.

It's interesting that the shares are back to where they were before they bought Redbox, while coinstar has continued to perform as well as anyone hoped (i think). Main loss of value has been Eco. Just shows the damage that a bad acquisition can do to do a good cash flow business.

 

Clearly the thesis has changed, but so has the price. The cost to extinguish their debt has also declined 20%. Would I sell at $75 today if I had the chance? Of course. Would I sell at $25? Maybe (Will probably reduce).

[kab60]

I'd expect management to lowball since they're new and apparently didn't have much visibility back in december, but at mid guidance you're looking at an EV/EBITDA of 3,9. Most of the business is in secular decline, a lot of the EV is debt and there's a capital allocation risk if management decides to throw a hail mary (I think that's less likely now since they'll have to stay within reasonable leverage ratios). I like other stuff a lot better at this valuation but would like to get back in (I was lucky to sell pre december profit warning) if Redbox was served as a free option on top of Coinstar. That would still be a lot lower for the stock though seeing as debt is such a big component in the capital structure.

[jason]

I think a lot of people are learning from Outerwall they way those that purchased Horsehead did.  Along with avoiding commodities I'll be sure to avoid any melting ice cube thesis in the future. 

[KJP]

I think a lot of people are learning from Outerwall they way those that purchased Horsehead did.  Along with avoiding commodities I'll be sure to avoid any melting ice cube thesis in the future.

 

I think the lesson is to be very wary of melting ice cubes (i) whose enterprise values consist of a lot of debt, and (ii) that are returning cash through buybacks.  Those characteristics magnify the upside and downside of residual equity holders and make any valuation extremely sensitive to decline rates, which, at the end of the day, are not knowable.   

[rishig]

Hi guys,

 

I actually was the original starter of the former coinstar thread many years ago. That said, I got out when jana took a stake and when my thesis was wrong for the company. Back in the day I actually thought this was a growth company trading at a reasonable price. I thought ecoatm/rubi was a novel idea and they had other ventures/startups in the works.  I haven't been following the company so I don't know the business progress or lack of progress. But, when they shut down there ventures business I decided my thesis was wrong.

 

I do think being intellectually honest is key in investing. I took my largest loss last year ever with energold drilling at 45 percent loss when I sold at 1.55. Because management kept making stupid moves. I couldn't tolerate it anymore and I decided I was wrong about the company.

 

Shifting gears. Stick with a thesis you have and if the facts change make a choice. There is no right or wrong choice. Its just having a strong opinion and conviction then making a move.

It's interesting that the shares are back to where they were before they bought Redbox, while coinstar has continued to perform as well as anyone hoped (i think). Main loss of value has been Eco. Just shows the damage that a bad acquisition can do to do a good cash flow business.

 

Clearly the thesis has changed, but so has the price. The cost to extinguish their debt has also declined 20%. Would I sell at $75 today if I had the chance? Of course. Would I sell at $25? Maybe (Will probably reduce).

 

One important thing to note is that the senior unsecured notes ($608M) is junior to term loans and line of credit ($280M). If the business decline accelerates and the notes trade at a wide discount to face value, the covenants in the term loans/line of credit may not allow making large purchases of the junior unsecured notes (in order to protect from value transfer to a junior security).

[Kiltacular]

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.

 

This encapsulates the problems with a cash flowing declining business for ongoing owners.  The best place for these types of businesses is inside a conglomerate (Berkshire).

 

I know someone can think of a decliner like this that has worked out great but I can't....what happened with the yellow pages one...did it work out for those that held to the own...newspapers (small town or national) might hang on.  Any great examples from someone that can think of a standalone decliner that worked out for the equity holders -- I guess Berkowitz and Lampert are giving a good try at Sears (adding back the spinouts and assuming they're sold immediately).

[Guest roark33]

Wow, I just read through the results and they are awful.  I am surprised that some people are willing to discuss 2021 numbers.  I would be hard pressed to talk about 2018 numbers with a straight face.  Blockbuster filed for bankruptcy a little over 5 years ago, so to think about 2021 seems a little strange.  Given the debt, I am unsure if the equity is worth anything. 

 

Another bad point for rebox in recent years is how much of the box office is dominated by a few films.  Most of these films are then seen by people in the theaters, thus decreasing the need for redbox.  That's something that is becoming more evident in their results.  How many people in the US didn't see star wars in the theaters, but it clearly dominated q4 box office revenue. 

 

[thefatbaboon]

I think one has to be a bit careful not to exaggerate.

 

Outerwall has still managed to produce 250m of fcf last year. Same as the year before. They estimate about 40% of their current mkt cap in fcf this year.

 

+30m renters of +500m DVDs. To put that in perspective that is more than The number of Marlboro smokers. Or more than the total populations of the ten biggest us cities added together!

 

A lot of Americans continues to have DVD players, no internet, and are poor.

 

I'm ok saying there will be a small rump redbox business in 2021.

 

Coinstar will be around for a very long time. Over the last years Transactions go down only to the extent of average transaction sizes going up. Ie the same number of coins are going through. The coinstar business is easily worth the current debt stack.

 

I can accept if people don't agree, so I won't belabour the point any more, but I feel if management is not stupid there is money to be made buying at these levels.

[Guest roark33]

http://www.sec.gov/Archives/edgar/data/941604/000141588916004648/sc13d09455019_02082016.htm

 

Engaged capital (14%) will certainly call for a "strategic review."  Their playbook has two plays, looks like they are fairly underwater on their position already, started buying after the pre-release in december around 38. 

 

The problem with a "small rump" of a business in 2021 is that at some point (and I don't know when this is), the operating leverage in OUTR begins to work the other way with redbox.  It could actually lose money as an operating unit for a few years until they shut it down in hopes that they can "fix it".  For those 2 years, coinstar would have to subsidize those losses. 

[rkluwer]

Sale of OUTR ??

 

I have sold my shares, but do hope for the rest thats sitting with this, that this might ease the pain....

 

http://seekingalpha.com/news/3088336-bloomberg-engaged-capital-amassing-stake-outerwall

 

 

[Guest roark33]

I am not sure what a PE buyer could do with company.  A better buyer would actually be a company like BCOR with lots of tax losses, that could manage the decline and utilize the tax losses in their legacy business agains the remaining profits in OUTR.  PE buyers need an exit and that's almost always the public markets in a few years.  Could you imagine the IPO for OUTR in 2019? 

[Txvestor]

Selling eco atm and redbox and extinguishing debt could make outerwall a very nice recession resistant cash cow stock. If they get a decent price for redbox ie atleast 5x current estimates of FCF, which could be more worthwhile for an acquirer with NOLs that they could use(as they pay a pretty high marginal tax rate) and some value even if just 50m for eco ATM(they paid over 300m for it and threw more down the drain investing in it!). The remaining stub of Coinstar is probabaly worth 2x current share price.

5x estimate of next years FCF would leave any upside of management expertise(i beleive redbox was under managed recently) and any upside from slower decline in dvd rentals than current expectations, and improvement in box office, and any financial engineering options to the acquirer, who arguably could do very well. FWIW, i think astute management who is not afraid to shrink the franchise and relentlessly take out costs, invest in promotional activity locally then close kiosk if needed efficiently etc. could gradually stabilize the business at some lower level, as I beleive there to be a core of locations where Redbox is likely to still be around and profitable even in 2021. It won't be 150m FCF, but if managed well it might be FCF 50m with an annual decline of 5% and that is worth something.

That type of sale Is now not an entirely impossible scenario and good to have an activist on the board. I would also love to see a good capital allocator like  Mecham take up a board seat(though i suspect it is more likely he would have exited when the 13fs come out next week). Based on the performance of the last 2 yrs I think Board/management needs adult supervision.

At these levels i see limited downside.

[flesh]

I'd love to hear what the current longs are modeling for redbox/coinstar declines going forward if any? Also, qualitatively, how are you arriving at your decline rate? Does your return rely on anything like increasing prices or rolling over the debt?

 

I've put this in the too hard pile myself but it would be interesting to hear where longs are coming from as I'm quite negative at this point.

 

1. If you assume guidance for 15-20% declines going forward for redbox, is your model different?

 

2. Is it meaningful that if they close under performing kiosks they will lose some of their spontaneous renters as there are fewer return locations? Fewer locations=smaller profit margins?

 

3. Do you model a quick decline for redbox that slows to a trickle at some point?

 

4. Does it concern you that credit cards/venmo's/apple pay will accelerate the move to a cashless society? Less cash=less change?

 

5. Do you have certainty the debt could be rolled over if coinstar and redbox are declining?

 

6. What sort of rental volume decline do you attribute to a price increase in coinstar/redbox? How do you determine this is a net benefit?

 

 

[rsmehta]

Something really doesn't make sense as to why there was such an acceleration towards fewer rentals in Q4.

 

    I really think the fact that Star Wars was coming out, people flocked to see the first original 6 star wars, which really took away from other movie rentals.

 

    I'm surprised no one has mentioned this.

 

   

--------------------------------------------

At these prices, the company can buy back all the outstanding shares in a little above two years time.

 

    If somehow they are able to generate similar cashflow from 2015(Remember, in Q3 they generated 65mm of FCF on a terrible movie slate), they will be able to purchase all the shares in under 2 years time.

 

---------------------------------------------

 

    I really hope they are taking advantage of the buybacks.

 

    I hope they spend over $150mm in buybacks this year.

[Guest roark33]

In the world of completely anecdotal information, I got a new phone yesterday, but I went and priced it at ecoatm before I went to verizon.  iPhone 6, $185 from ecoatm and $240 from verizon.  Also, samsung was running a promotion, get 200 credit when you turn in any phone, the guy showed me a box off all these crappy phones people had been turning in....