OUTR - Outerwall

[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.

 

...

 

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.

 

I had meant to answer this before but I'm kind of glad I didn't because there's the new activist twist.

 

So it wasn't just short covering.  It was also a small fund willing to put 40% of their assets into OUTR.  Problem is, now that they are an "insider," they are effectively trapped unless things go their way.  If they start selling shares they have to file almost immediately and the market will probably not take a kind view to a 14% owner who can't see a pathway to creating value at a cost of $33.  There's been many examples of this recently, but an activist campaign in a not-so-liquid, melting ice cube gets really nasty if the business doesn't improve.  I really don't understand the idea behind putting 40% of your fund in a position where you're essentially trapped. 

 

At this point I hope it works out for the longs and Engaged (especially since I stupidly covered my short last year).  Even if the shares went up to $200 I wouldn't look back and say I made a mistake by not buying.  The long thesis looks dead/too risky to me and you need a couple hail mary's to get to the finish line.  So if I was long I would need a metric crap ton of conviction or else why even own it?

 

Reminds me of Buffett and Tesco in a way.  Any exit from a bad investment should be sloppy otherwise you don't learn any lessons.  Waiting for the right price to sell is what everyone else is doing too... A graceful exit from too many bad investments will throw more luck into your returns and develops bad habits. 

 

http://www.theguardian.com/business/2015/mar/01/warren-buffett-admits-thumb-sucking-over-tesco-cost-him-444m

[Guest roark33]

This is absolutely meaningless, but since so many people on this board think otherwise, I thought I would post it.  Looks like Mecham added to his stake in Q4.

 

https://www.sec.gov/Archives/edgar/data/1568820/000160658716000454/xslForm13F_X01/form13InfoTable.xml

 

Also, one thing that I thought I would correct about Mecham is that he is no longer is "away from the financial markets in Utah," as some have mentioned.  He actually moved to NYC about a year ago. 

 

 

[frommi]

He actually moved to NYC about a year ago.

 

Really? :)

Now that explains his recent problems with the market. :D

[JayGatsby]

When does his 2015 letter come out?

[AzCactus]

He actually moved to NYC about a year ago.

 

Where did you find that?

[Txvestor]

He actually moved to NYC about a year ago.

 

Really? :)

Now that explains his recent problems with the market. :D

 

Lol. Thats hillarious. And not without a kernel of truth either.

 

Though I'm surprised that he added, i think this decision does not include the latest quarterly results which were extra poor. He may very well have sold this quarter just as many on this board have done. We won't know that till May. The last FCF guidance of 140-190m was what really shook investor confidence.

It's possible management have undershot guidance as they potentially have the motive of getting more for the buyback $$, however on an intrinsic business valuation measure, it was a very damaging quarterly report. That said the severe correction of price also accounts for the negative developments. The emergence of an activist investor, any upside from better management, further concentration of share ownership, and any potential refinancing of debt, PE takeout are potential upside catalysts.

Definitely not a slam dunk but risks and rewards are balanced here now.

[fareastwarriors]

He actually moved to NYC about a year ago.

 

Really? :)

Now that explains his recent problems with the market. :D

 

;D ;D ;D

[Snorky]

Hello board members, im knew to the board and this is my first post, but i have been reading for a while. Im invested in Outerwall with a decent position. I saw in the last filling of Arlington on whaleswhisdom.com (usually i use dataroma.com) that Mecham owns additionally to his Outerwall stake an amount of 55,200 OUTR(CALL). Does anyone know which specific calls he owns or where i

can find some information about that ?

[gfp]

Hello board members, im knew to the board and this is my first post, but i have been reading for a while. Im invested in Outerwall with a decent position. I saw in the last filling of Arlington on whaleswhisdom.com (usually i use dataroma.com) that Mecham owns additionally to his Outerwall stake an amount of 55,200 OUTR(CALL). Does anyone know which specific calls he owns or where i

can find some information about that ?

 

Is this what you are looking for?

http://www.sec.gov/Archives/edgar/data/1568820/000160658716000461/0001606587-16-000461-index.htm

 

and

http://www.sec.gov/Archives/edgar/data/1568820/000160658716000454/xslForm13F_X01/form13InfoTable.xml

[Snorky]

Not exactly...I see that there are two different positions of OUTR in his portfolio, but I don't get the difference between them.

[gfp]

one appears to be a call option, the other common

[Snorky]

Ok, I guess there are no further information regarding the call options (strike price etc.) because it can't be find on SEC. Thank you anyway for your effort

[Guest roark33]

Engaged letter to board:

https://www.sec.gov/Archives/edgar/data/941604/000141588916004829/ex991to13da109455019_021816.htm

 

They do a nice job of pointing what OUTR has done wrong.  Whatever the outcome this price, Engaged's entire presentation is a good example of why you should pass on melting ice cubes.  Mgmt consistently buys back shares that destroy value, allocate capital to "growth" ventures in an futile effort to preserve the company, etc, etc.

[Picasso]

Over the past four years, OUTR has spent over $1 billion of shareholders’ capital to repurchase shares at an average price of $63. Those shares the Board and management undoubtedly believed were “cheap” at $63 are now worth approximately $30. In total, this “investment” has destroyed approximately $540 million of shareholder value and generated a 52% loss.2

 

If they think that much value was destroyed then why are they long at $30?  It was just poorly timed and the value destruction is temporary if they think there's value here.  I mean they have a cool little table saying OUTR could be worth over $400.

 

Their upside table is pretty awesome though.  I don't think a 15% dividend yield should be viewed as base case valuation (maybe closer to 30%) and a 2.5% dividend yield is absurd.  At a 30% dividend yield that would put OUTR shares at $20 and then you have to consider future declines in the business.  It would make it hard to short the stock (that's for certain) so it sounds like they're pushing for a short squeeze.  Anyone care to run the numbers on a business in secular decline with a 2.5% dividend yield? 

[Txvestor]

Picasso,

Irrespective of your negative view of OUTR, and the clear hyperbole of a 2.5% divi yield, I am sure you can see that this board of directors has pissed away a lot of capital, and added value destroying leverage to the capital structure with their ill timed stock buy backs. Since we agree that IV has deteriorated over this time and the board got the timing very wrong, performance matters and they have performed poorly and need remedy.

I think this letter makes a lot of very valid points, and this board will have a hard time fighting anything here with facts. Since most shareholders will be seething at the thought of them declining to entertain offers as high as 3x current share prices in the past, i think they are likely to be overthrown if they resist much. I really cant see any of the larger shareholders backing this board. I believe Mecham counted potential misallocation of capital by thre board as a concern/risk. Given the gravity of this misallocation and the continuing bull headedness of management in their actions, i doubt large shareholders will be kind to them, considering how precarious the capital structure has become. It is now becoming clear why the former CEO was pushed out, and obviously hindsight proves he was right. Hence the board must be called to answer and replaced if needed. That's what these guys are doing.

I for one am glad that they are doing this service for minority shareholders. I do think there is a higher value to be had here with the appropriate management of these assets and capital structure.

[JayGatsby]

Interesting letter. I'd just assumed the former CEO was pushed out because they had to have someone to hang for the botched ecoATM. Glad they finally brought some of these issues to light.

 

I'm not convinced of their point on share repurchases... if the NPV is higher than the share price isn't a repurchase better than a dividend? You might not get an immediate pop but if you are right in your assumptions (i think that's where they (and I) went wrong) the total cash flow will be higher.  The idea of paying out all FCF as a dividend seems risky given the declining cash flow. Most shareholders were in favor of the repurchase plan (implemented when JANA partners was involved) so hard to totally blame management.  Their argument that the timing of repurchases was terrible is pretty spot on.

 

I also don't see why a private owner would achieve higher returns than a public owner. I hear that argument a lot. This is only true if the private owner is able to manage the business better than the public owner, correct? (granted they've set a pretty low bar)

[Picasso]

Txvestor,

 

I don't disagree that the company has pissed away a lot of capital.  But I think the investors who look at ecoATM, the Verizon venture, RedBox Canada as forced errors miss the point.  RedBox was first created by McDonalds in 2002 and Coinstar made the decision to purchase that venture over the next few years.  This is just the nature of the Coinstar/Outerwall business.  They have always thrown a lot of crap against the wall and some of it ends up sticking.  Well only two things really stuck.  RedBox stuck really, really well.  You don't have the success of Outerwall without all the money losing ventures like ecoATM.  It's like saying I only want to own the call options that do really well and avoid the other 90% that blow up on me.  When you buy into Outerwall, you have to buy into their ability to keep finding the next "thing."  I'd guess that over very long periods of time, Outerwall's approach will generate relatively low returns on invested capital when you account for all the failed ventures and capital costs associated with it.

 

It's nice that Engaged is doing this because it needs to be addressed a lot better than the JANA approach.  But just think about what Engaged is saying: don't repurchase shares, milk the remaining cash out of the existing business in secular decline, don't invest in any new ventures, and give that cash back to shareholders.  I mean that's basically saying the terminal value here is zero and it ignores covenants on the debt and how quickly earnings can drop in two years when that debt needs to be refinanced.  So I don't quite understand their logic of saying the equity has a value based on the dividend yield.  I can point out ten stocks that yield over 50% in todays market and no one is valuing them on the dividend yield. 

 

One thought exercise would be to take the RedBox and Coinstar cash flow and put them into a YieldCo structure.  What do you think the market would pay for the YieldCo and how does it compare to the current OUTR enterprise value? 

 

Take any of their upside cases to the equity, add in the debt, and figure out your unlevered free cash yield to a private buyer.  I think when you start looking at those numbers it doesn't look that appealing for a private buyer anymore.  A year or two it absolutely did, but much less so today.  So the dividend yield approach isn't relevant here unless you're just trying to cause a short squeeze and take whatever cash is left from the business.  I think a better approach would have been to tally up future years dividends and discount it back to today and say "here's the value that can be created by returning the cash."  No one is going to buy OUTR to get paid an 8% dividend yield when it's in secular decline.  Well maybe some guys on this board.

 

Either way, yes I agree that Engaged is doing a better job of addressing some of the real issues here.  I hope they get a win out of this otherwise they'll need to change their fund name to Enraged Capital.

[JayGatsby]

This is mostly repeat from their letter but figured I'd post anyway... worth a quick flip: http://www.engagedcapital.com/press/OUTR-presentation.pdf

 

Disagree with most of their capital allocation discussion but glad they're pushing for change at the Board level. Good news is based on their "Areas of Expertise" page they're experts at everything, so we should be in good hands.

 

Picasso, If I remember right Redbox was a proven concept when they acquired it. It was working on a small scale and coinstar had the scale and ability to roll it out much broader very quickly. As far as I can tell Eco never worked on any scale. There should be platform value to OUTR, they're just not good at it.

[BeerBBQ]

Does anyone know how much a coinstar kiosk costs?

[flesh]

If they

 

1. 70% fcf to any debt selling below 90, 95% fcf to debt below 80

 

2. trimmed as much fat as possible and sold/ended eco

 

3. 15% fcf buybacks

 

3. 15% fcf divi's

 

I could get interested again.

 

[BeerBBQ]

I looked back at the early 2000 filings to get a sense for what the standalone Coinstar business looked like.  Back then, FCF as a % of  dollar volume processed was 1.5%.  I don't know if that has changed over time, improved, or worsened.  Any thoughts?

 

If the economics today are similar to then, Coinstar would be generating around $50m/yr in FCF based on today's dollar volume. Has the company mentioned what the Coinstar FCF has been in the recent past (I have seen the $75m est from Arlington letter a few years ago)?

 

Also, the guidance for Coinstar capex is $7-9m.  Any thoughts on why that is so low?  seems to imply $350/machine maint capex (looks like they aren't adding new installs)?  even if Machine life is 10 years, that implies these machines cost $3,500.  Is that accurate? Several years ago, capex/unit was around $15k.  Anyone know what one of these machines costs today?

 

 

 

 

 

 

[JayGatsby]

I looked back at the early 2000 filings to get a sense for what the standalone Coinstar business looked like.  Back then, FCF as a % of  dollar volume processed was 1.5%.  I don't know if that has changed over time, improved, or worsened.  Any thoughts?

 

If the economics today are similar to then, Coinstar would be generating around $50m/yr in FCF based on today's dollar volume. Has the company mentioned what the Coinstar FCF has been in the recent past (I have seen the $75m est from Arlington letter a few years ago)?

 

Also, the guidance for Coinstar capex is $7-9m.  Any thoughts on why that is so low?  seems to imply $350/machine maint capex (looks like they aren't adding new installs)?  even if Machine life is 10 years, that implies these machines cost $3,500.  Is that accurate? Several years ago, capex/unit was around $15k.  Anyone know what one of these machines costs today?

I thought coinstar EBITDA is ~$120 and then they should probably have some corp allocation. Subtract the maint capex gets you to say $100, give 40% in taxes and you're at $60M of FCF.

 

They aren't adding any new units so I'm not sure what's in the capitalized costs. The small repairs would be expensed so all that's capitalized is major repairs/overhauls and any new units (which would probably be swapped from an old location). A grocery store near me just opened and has both a Redbox and a coinstar. I assume both of those came from a different location although impossible to know.

[rsmehta]

Am I the only one that thinks the rapid decline in Redbox seems to be a bit weird?

 

 

Star Wars franchise coming out, and the American public using their rental dollars on Episodes 1-6 seems to be an underrated variable.

 

  I'd want to argue that the American public rented/bought star wars DVD's 50M-100M times in Q4, and none of that came from Redbox(counting each star wars movie as an individual movie). To be fair, I really have no idea for the actual number, I'm pulling these figures out of my a**.

 

    Compared to red-box renting out a total of 135M movies in Q4, and none of them being episodes 1-6, this would have a huge impact on their results, their share of the DVD rental market would have drastically lagged compared to earlier quarters.

 

 

    Maybe the reason for the dismal quarter has to due not with DVD rentals having died in America, but Disney being a Douche and Redbox just having a much lower share of the DVD rental market in Q4?

 

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

 

Using Redbox rentals per quarter and FCF in each quarter being the main drivers to this stock, In 2015 we had:

 

    Q1 rentals: 173 M FCF: 85 M

    Q2 rentals: 146 M FCF: 55.6 M

    Q3 rentals: 132 M FCF: 65 M

    Q4 rentals: 136 M FCF: 42 M

 

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

    Anyone on this board venture to guess Q1, Q2, Q3, Q4, Annual, rentals and FCF for 2016??

 

    My guess is ~500mm rentals in 2016

                        FCF: 220M

 

    What does the board think the total DVD rentals in America for new releases be in 2016, and what % of that will redbox have?

 

    If anyone has some of the above answers^^, I would be really interested to know.

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

 

    Unlike engaged capital/other people on this board, I hope they are buyback shares aggressively at this price(extinguishing 5-7mm shares this year), but that's just my hope.

 

 

[FCharlie]

I don't really like the proposal from Engaged Capital that OUTR should pay a giant dividend. It would indeed force a lot of shorts to cover, but they wouldn't be able to sustain the dividend level without share repurchases. My suspicion is that even though Engaged claim to be long term investors, they really just want to make the stock to soar and then they would sell their position.

 

The rational thing would be to raise the dividend, perhaps double it. Then OUTR should continue to repurchase debt in the open market at 75 cents on the dollar while also repurchasing shares. They should shut down ECO Atm if it can't break even this year. They can wind Redbox down over the next decade. I don't think it's going away any sooner than that. When all is said and done, Coinstar will still exist and perhaps the debt will all be gone and the share count will be only a few million shares total. If Coinstar stays constant, free cash flow per share would be enormous even this far in the future.

 

It surprises me that a Warren Buffett style investor has not made a run at this company.

[rsmehta]

http://ir.outerwall.com/investors/news-and-events/financial-news/news-releases-details/2016/Outerwall-To-Explore-Strategic-And-Financial-Alternatives-To-Maximize-Shareholder-Value/default.aspx

 

Outerwall doubles dividend from $0.30 to $0.60 per quarter

 

Hired Morgan Stanley to explore strategic and financial alternatives for the company

 

shares up 12% afterhours

 

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

 

  What's also interesting in this news release is that they say they will use their FCF for:

 

"the continued goal of returning significant free cash flow to investors with a preference for dividends and opportunistic debt retirement."

 

    Sounds like they are holding back on share buybacks until debt becomes manageable?

 

    The number 1 rule of share buybacks is that when share price becomes really depressed, this is the time buy back aggressively, especially when they have the cash on hand.

 

    That being said, I don't hate that they are not buying back shares, just a bit irritated that they were extremely aggressive with it for the past two years(including the past 6 months) and they pulled the plug at the most opportune time. But I understand using cash for this purpose this runs the risk of bankrupting the company which is a melting ice-cube, especially when you use debt to buyback the shares.

 

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

 

 

    Short squeeze coming soon??