OUTR - Outerwall

[kab60]

Sure. I really like it at these levels as well but management is a real risk.

2014_Annual_Letter_.pdf

[JayGatsby]

Thanks for posting.  I try to remind myself of this every day... on multiple positions  ;)

 

Investors worried about longer-term risk should hope for a steep and sustained drop in

OUTR’s share price: if OUTR dropped 50% to $31 per share, and stayed there,

management could theoretically buy back 90% of the shares in 2 years’ time. This would

accelerate returns and reduce risk.

[Guest roark33]

I don't understand why people always make this argument about share prices falling being a good for a company.  This is basically taking something someone smart said out of context and repeating it until it means nothing.

 

If OUTR share price fell 50% in the next year, barring some total economic collapse, it would most certainly be company specific, i.e. they decide to sink another 200m in ecoATM, or rentals at Redbox fall off a cliff, etc. 

 

The market is sometimes irrational, but falling 50% for no company specific reason is just nuts. 

 

That's why you never see companies buy back their stock at 50% off when it happens because it is usually happening for a reason.  Check out LL, OCN, ASPS, and coal/oil company out there.  So, please stop repeating that phrase....

[KCLarkin]

I don't understand why people always make this argument about share prices falling being a good for a company.  This is basically taking something someone smart said out of context and repeating it until it means nothing.

 

If OUTR share price fell 50% in the next year, barring some total economic collapse, it would most certainly be company specific, i.e. they decide to sink another 200m in ecoATM, or rentals at Redbox fall off a cliff, etc. 

 

The market is sometimes irrational, but falling 50% for no company specific reason is just nuts. 

 

That's why you never see companies buy back their stock at 50% off when it happens because it is usually happening for a reason.  Check out LL, OCN, ASPS, and coal/oil company out there.  So, please stop repeating that phrase....

 

Apple fell 45% in 2012-2013 despite 9% revenue growth. Please also read the washington post and teledyne case studies.

 

Unless you are a seller (or on margin or you own a diluter), lower share prices are always better.

[JayGatsby]

I don't understand why people always make this argument about share prices falling being a good for a company.  This is basically taking something someone smart said out of context and repeating it until it means nothing.

 

If OUTR share price fell 50% in the next year, barring some total economic collapse, it would most certainly be company specific, i.e. they decide to sink another 200m in ecoATM, or rentals at Redbox fall off a cliff, etc. 

 

The market is sometimes irrational, but falling 50% for no company specific reason is just nuts. 

 

That's why you never see companies buy back their stock at 50% off when it happens because it is usually happening for a reason.  Check out LL, OCN, ASPS, and coal/oil company out there.  So, please stop repeating that phrase....

I was being specific to companies that are buying back stock. Also specific to share prices of those companies, not the financial performance of the company itself. I have a few positions where the company has stated their intention to buy back stock so a lower share price will help them there. OCN included, but that's a separate discussion.

 

[Jurgis]

Please also read the washington post and teledyne case studies.

 

OT.

 

If you are talking about Washington Post when Buffett bought it, it could have gone bust during the strike. It was just a step away from biting it.

 

Looking back people think that WP was a no brainer investment for Buffett, but I don't think that was really the case.

 

Perhaps you are talking about something else though. :)

[KCLarkin]

Didn't Buffett buy in 73? Strike was in 75?

 

But yes, off-topic. The point is that cannibals benefit from lower prices.

[Jurgis]

Didn't Buffett buy in 73? Strike was in 75?

 

I believe he continued buying. I don't remember if WP was buying back at the time.

In any case, it coulda been bust in 75 buyback or not.

 

But yes, off-topic. The point is that cannibals benefit from lower prices.

 

Yes, if management is good/great in allocating capital. :)

 

Take care.

[Tim Eriksen]

Please also read the washington post and teledyne case studies.

 

OT.

 

If you are talking about Washington Post when Buffett bought it, it could have gone bust during the strike. It was just a step away from biting it.

 

Looking back people think that WP was a no brainer investment for Buffett, but I don't think that was really the case.

 

Perhaps you are talking about something else though. :)

 

I don't think the facts support this.  The company was still very profitable in 1975.  Revenues still grew.  The paper was only one of three major business lines - broadcasting and magazine publishing being the other two.  Here is the 1975 annual report

http://media.corporate-ir.net/media_files/IROL/62/62487/AR/Annual%20Report%201975.pdf

 

 

 

[merkhet]

I think Jurgis might be thinking about The Buffalo News. IIRC, they had a pretty debilitating strike too.

[AzCactus]

Guys I think this thread is for OUTR.  Not the Buffalo News or Washington Post.

[merkhet]

Guys I think this thread is for OUTR.  Not the Buffalo News or Washington Post.

 

Yes, we are all generally literate. Sometimes threads go off-topic. It'll probably be fine.

[AzCactus]

Guys I think this thread is for OUTR.  Not the Buffalo News or Washington Post.

 

Yes, we are all generally literate. Sometimes threads go off-topic. It'll probably be fine.

 

I didn't imply it wouldn't be fine.  But it is irrelevant.  Start a WP board if you want.

[siddharth18]

I don't understand why people always make this argument about share prices falling being a good for a company.  This is basically taking something someone smart said out of context and repeating it until it means nothing.

 

If OUTR share price fell 50% in the next year, barring some total economic collapse, it would most certainly be company specific, i.e. they decide to sink another 200m in ecoATM, or rentals at Redbox fall off a cliff, etc. 

 

The market is sometimes irrational, but falling 50% for no company specific reason is just nuts. 

 

That's why you never see companies buy back their stock at 50% off when it happens because it is usually happening for a reason.  Check out LL, OCN, ASPS, and coal/oil company out there.  So, please stop repeating that phrase....

 

Not to keep repeating what others have said but I want to point out something company specific that leads to heightened share price volatility. It's the fact that quarter-to-quarter revenues tend to fluctuate wildly due to movie release schedule. This has little to do with the long term company prospects but it nonetheless makes the market nervous.

 

If I recall correctly, in late 2010 share price went from $66 to $39 in two months because management overestimated the demand of the discs or something of that sort.

 

But I think everyone agrees that lower price per share in the short to mid term will help the long term holders.

[JayGatsby]

I don't understand why people always make this argument about share prices falling being a good for a company.  This is basically taking something someone smart said out of context and repeating it until it means nothing.

 

If OUTR share price fell 50% in the next year, barring some total economic collapse, it would most certainly be company specific, i.e. they decide to sink another 200m in ecoATM, or rentals at Redbox fall off a cliff, etc. 

 

The market is sometimes irrational, but falling 50% for no company specific reason is just nuts. 

 

That's why you never see companies buy back their stock at 50% off when it happens because it is usually happening for a reason.  Check out LL, OCN, ASPS, and coal/oil company out there.  So, please stop repeating that phrase....

 

Not to keep repeating what others have said but I want to point out something company specific that leads to heightened share price volatility. It's the fact that quarter-to-quarter revenues tend to fluctuate wildly due to movie release schedule. This has little to do with the long term company prospects but it nonetheless makes the market nervous.

 

If I recall correctly, in late 2010 share price went from $66 to $39 in two months because management overestimated the demand of the discs or something of that sort.

 

But I think everyone agrees that lower price per share in the short to mid term will help the long term holders.

 

The ecoatm impairments have an interesting effect. I think everyone on this board and most analysts have decided that segment is worthless, but when the accountants so so the market goes crazy.

 

I have a big cup of change I'll have to go throw in the coinstar!

[merkhet]

Guys I think this thread is for OUTR.  Not the Buffalo News or Washington Post.

 

Yes, we are all generally literate. Sometimes threads go off-topic. It'll probably be fine.

 

I didn't imply it wouldn't be fine.  But it is irrelevant.  Start a WP board if you want.

 

Look, I came off brusque because it seemed like you were coming off brusque. Let's try this again.

 

I don't know that a lot of policing of the off-topic stuff is necessary because I'm pretty sure the discussion on The Washington Post & The Buffalo News would have died off soon. Plus, it's not a terrible inconvenience to skip over a few off-topic posts. (i.e. The possibility of this turning into the VRX thread or a long-winded discussion of The Washington Post or The Buffalo News was low.) For instance, our discussion about the WP & BN discussion is now about as long as the discussion of the WP & BN itself.

 

Do you have that letter that you could post or otherwise more specifically describe what he struggles with?  Other than management burning cash (a real possibility to be sure)---this seems like a very solid investment with a lot of fcf. 

 

Sure. I really like it at these levels as well but management is a real risk.

 

I think the gist of Mecham's point is that the company is not exactly sitting on a long and growing runway. Instead, it's a company with a shrinking market that might be shrinking at a slower rate than everyone else thinks -- that can provide a good return, but it's not the stuff from which great investments (GEICO, Coca-Cola, etc.) are made.

 

I have a bit of a divergent view on management, I think. As investors, we often think that we want management to return cash to shareholders so that they don't waste it chasing things down rabbit holes, but it's not necessarily true that this is the highest and best use of funds. It's often just the most immediate use of funds. Occasionally, companies can use the that cash in ways that are useful. While we all look at EcoATM as a complete waste of time and/or funds, it's an adjacent business that the management knows how to run. ("Vending Machines" + coins/DVDs/electronics) It turned out to be a bad investment, but it seems like management has been attempting to find a longer runway.

 

Now, the fact that they've been unsuccessful on finding that is certainly a black mark on them, but I don't know that it's a foregone conclusion that they shouldn't attempt to do so again in the future.

[Jurgis]

Please also read the washington post and teledyne case studies.

 

OT.

 

If you are talking about Washington Post when Buffett bought it, it could have gone bust during the strike. It was just a step away from biting it.

 

Looking back people think that WP was a no brainer investment for Buffett, but I don't think that was really the case.

 

Perhaps you are talking about something else though. :)

 

I don't think the facts support this.  The company was still very profitable in 1975.  Revenues still grew.  The paper was only one of three major business lines - broadcasting and magazine publishing being the other two.  Here is the 1975 annual report

http://media.corporate-ir.net/media_files/IROL/62/62487/AR/Annual%20Report%201975.pdf

 

OK, thanks. I guess the risk was just paper going under then. This was way overdramatized in Snowball then. I tried to look up other sources, but can't find them on short notice. :)

[thefatbaboon]

Anyone got any opinion on the new CEO other than the basic google info?

 

 

[JayGatsby]

I have a bit of a divergent view on management, I think. As investors, we often think that we want management to return cash to shareholders so that they don't waste it chasing things down rabbit holes, but it's not necessarily true that this is the highest and best use of funds. It's often just the most immediate use of funds. Occasionally, companies can use the that cash in ways that are useful. While we all look at EcoATM as a complete waste of time and/or funds, it's an adjacent business that the management knows how to run. ("Vending Machines" + coins/DVDs/electronics) It turned out to be a bad investment, but it seems like management has been attempting to find a longer runway.

 

Now, the fact that they've been unsuccessful on finding that is certainly a black mark on them, but I don't know that it's a foregone conclusion that they shouldn't attempt to do so again in the future.

That's a good point, and honestly something I hadn't really thought about before. Took me a little time to think about. Obviously Coinstar's acquisition of Redbox had a tremendous ROI. I'd be curious to see the unit level economics on Redbox when they bought it. You raise a good point, that they're well positioned to find good ideas and use their overhead, cash flow and retailer relationships to roll that out nationwide. I would have assumed that identifying a good idea is pretty straightforward when you see it (ie, this $XX box is cash flowing $XX a month and requires $XX of overhead to service). The risk/return in that scenario should be very good (like redbox)... buy a concept when it has 10 boxes and needs capital and quickly expand it to 1000 boxes.

 

What bothered me on ecoATM was they could never point to any indicators that it worked, other than capex. Analysts asked them very directly about the unit level economics on the calls and they'd dodge (not answer) the question. The first investment into ecoATM was $14M in February 2011 after the concept won some new concept award from TechCruch. I don't think anyone is critical of that investment. They didn't buy full control though until July 2013.  I would have thought that in those two years the test units really started cash flowing to justify the high price. Now 2.5 years later they're still chugging along with it and they haven't shown anyone numbers to justify the spend. Maybe it was the combination of more competition and low commodity prices that screwed it all up. I'd think a simple 1 page cohort analysis would tell whether the idea works or not.

[merkhet]

Yea, I think the problem was that the competition for used electronics is significantly higher than the competition for coins and/or DVDs. Nobody wants in to those two markets, so they're much better positioned. (It reminds me of Greenwald's Competition Demystified where he says that rapidly growing markets are generally worse for developing and/or maintaining a competitive advantage than slow growing or mature markets.)

 

Maybe they should have figured it out earlier. I don't know. However, I don't think that, necessarily, it means they should never do something like this again and only return the capital. I'd love to see them continue making small risk-constrained bets in "adjacent" markets like this and see what sticks. Emphasis on "small." :)

[TwoCitiesCapital]

Yea, I think the problem was that the competition for used electronics is significantly higher than the competition for coins and/or DVDs. Nobody wants in to those two markets, so they're much better positioned. (It reminds me of Greenwald's Competition Demystified where he says that rapidly growing markets are generally worse for developing and/or maintaining a competitive advantage than slow growing or mature markets.)

 

Maybe they should have figured it out earlier. I don't know. However, I don't think that, necessarily, it means they should never do something like this again and only return the capital. I'd love to see them continue making small risk-constrained bets in "adjacent" markets like this and see what sticks. Emphasis on "small." :)

 

I would love to see this too; however, the past hasn't given much encouragement in their ability to generate these ideas in house. I mean, Coinstar was one great idea that bought Redbox, another great idea. So far, those two ideas are the only two that have generated any real return. If they were the ones operating the electronics kiosks in airports, I wouldn't be angry. If they were the ones operating a national chain of automated ice machines, vending machines, etc - I wouldn't be angry. If they had a national chain of ATMs, I wouldn't angry. All of those are automated solutions that could leverage their current distribution network etc. (Maybe a little differently for cash/food/movies/etc, but you get my point). Many of these are proven concepts with decent return prospects (like ATMs).

 

I don't know why they haven't looked at doing any of these. I'm not aware of all of the subtleties of making those businesses work, or if Outerwall lacks the ability to get them to work. But any of these would fit into their automated kiosk-type business and exist because they're generating a return for someone...Outerwall's ideas have so far only proven to burn cash.

[merkhet]

Yea, that part I don't know. I think they don't like existing businesses like ATMs because they don't see how they have any competitive advantage there and/or there's a saturation point -- but it's hard to tell.

 

The big issue for me on management is how their process works. We're only seeing outcomes, so I'd love to know a little bit more about their process for determining when to move forward with ideas like EcoATM. And, importantly, when to stop.

[TwoCitiesCapital]

I just like thinking about a company that can use a fraction of it's cash flow and still repurchase enough shares to be meainingfully measured in "% of company per quarter".

 

Q1 they repurchased $41M of shares at an average price of ~$65. Required about 45% of the as-reported FCF for 3.2% of the company.

Q2 they repurchased $22M of shares at an average price of ~$77. Required about 40% of the as-reported FCF for  1.5% of the company.

 

I don't know what buybacks for Q3 and Q4 will look like, but I think it would be a pretty reasonable baseline assumption to assume another $20M in each at average prices of $65 (or lower depending on action in Q4). I'd also like to think that the management is aware of the lower prices and may commit more capital to the repurchase now that prices have fallen nearly 30%. We could very likely see an 8-10% reduction in share count for the whole year right before heading into 2016/2017 where deprecation expenses roll-off and more of the FCF hits the bottom line making it a more "obvious" buy for those who have followed the name less closely.

 

I don't think $80-$100 in 2016 is a tall-order unless if they change direction drastically and/or throw a lot more cash at ecoATM. Obviously, I agree with Merkhet in wishing they had opportunities to reinvest in to keep the business going longer, but I'm extremely happy with 1.5-2% repurchases every quarter on top of a dividend until we get there.  I just hope that we get another blowout quarter like Q1 one more time while prices are low so we can get another massive chunk of the company back at reasonable prices.

 

 

Also, results to be announced on 10/29.

http://www.prnewswire.com/news-releases/outerwall-inc-to-report-2015-third-quarter-financial-results-on-october-29-2015-300152860.html

[kab60]

Found this recent short thesis by some University folks - confirms my thinking that longer education isn't necessarily a good thing.

 

https://www.google.dk/url?sa=t&source=web&rct=j&url=http://www.economist.com/sites/default/files/universityofcoloradoeconomistcasestudycompetition.pdf&ved=0CC0QFjADahUKEwjVkbbL_qXIAhWra3IKHcfaCvE&usg=AFQjCNEURvi2lb4wiIjxO-tADg11UK-8Wg&sig2=TA0hs787NJz9B1DD2dJyPw

 

It's not worth reading unless you wanna make sure you didn't miss anything if you're long.

[shhughes1116]

I am implementing a pair trade on this one.  Long OUTR and short University of Colorado.  The abundance of marijuana, and marijuana-infused food will cause University of Colorado, a billion dollar institution, to go to zero.