OUTR - Outerwall

[DanielGMask]

TBH - My valuation of redbox is has generally fallen between $80-$100 per current share, though obviously this isn't static. Each year as the share count shrinks, the target value can move upwards.

 

That being said, what I find most attractive about OUTR is not so much the actual compound return, but that the compound return will likely be uncorrelated to the market return. I've been absolutely terrified of the valuations in the U.S. Historically high multiples on top of historically high margins seems like an obvious combination for terrible long-term returns and investor disappointment. And we have a powder keg of lower earnings, slowing China, lower liquidity, potential rate hiking cycle, and a possible recession where any single one of those things going off could spell the end to the rally.

 

I rather like having a stock that I estimate may earn 8-10% per year and whose return will accelerate if it participates in a massive market sell-off. Also, knowing there's a constant bid for a large % of the shares backed by relatively stable cash flows suggests to me that it would fall less than the general market giving me increased confidence in allocating a larger % of my cash to it.

 

The problem is that most companies only do buybacks when times are good and the stock reflects the good times. Few have the flexibility to do buybacks when times are bad and a real deal can be had. OUTR likely will be able to and that's part of the reason I view the 8-10% return scenario so favorably. 8-10% is my base case. In an environment where every other stock would do terribly, OUTR's 8-10% return figure will actually grow significantly.

 

 

 

I really think this is fantastic reasoning. The attraction to OUTR for me is first and foremost the limited downside. As long as the Redbox doesn't fall off a cliff and management stays reasonably committed to returning capital to shareholders your investment should be protected. Whether either of these things will happen is up for you to decide...but in the event of a significant market drop you will do quite well in the long run all else equal.

 

I don't agree with this reasoning! By this measure you'll be better waiting in cash for that possible sell-off.

 

I think that knowingly owning a business that's heading to obsolescense is risky. Just think of Blue chip stamps, amazing cash flow, great model, magnificent return on investment! If you are Buffett or Munger and control what to do with that cash flow then you may find your Sees and get an amazing return from that investment, but if you are a passive holder waiting for management to do the trick, I think you are in for some trouble.

[AzCactus]

Daniel,

I see and respect your point.  However there are two things I think are worth mentioning. 

1. They sell a product at about a third the price of the competition.

2. Netflix was founded in 1997 and publicly traded since 2002.  The companies have coexisted for quite sometime.

 

Assuming that Outerwall faces an inevitable decline has been talked about for sometime but not really materialized.  The biggest risk here is management NOT returning the 75-100% of FCF back to shareholders and wasting it on experiments like EcoATM. 

[TwoCitiesCapital]

TBH - My valuation of redbox is has generally fallen between $80-$100 per current share, though obviously this isn't static. Each year as the share count shrinks, the target value can move upwards.

 

That being said, what I find most attractive about OUTR is not so much the actual compound return, but that the compound return will likely be uncorrelated to the market return. I've been absolutely terrified of the valuations in the U.S. Historically high multiples on top of historically high margins seems like an obvious combination for terrible long-term returns and investor disappointment. And we have a powder keg of lower earnings, slowing China, lower liquidity, potential rate hiking cycle, and a possible recession where any single one of those things going off could spell the end to the rally.

 

I rather like having a stock that I estimate may earn 8-10% per year and whose return will accelerate if it participates in a massive market sell-off. Also, knowing there's a constant bid for a large % of the shares backed by relatively stable cash flows suggests to me that it would fall less than the general market giving me increased confidence in allocating a larger % of my cash to it.

 

The problem is that most companies only do buybacks when times are good and the stock reflects the good times. Few have the flexibility to do buybacks when times are bad and a real deal can be had. OUTR likely will be able to and that's part of the reason I view the 8-10% return scenario so favorably. 8-10% is my base case. In an environment where every other stock would do terribly, OUTR's 8-10% return figure will actually grow significantly.

 

 

 

I really think this is fantastic reasoning. The attraction to OUTR for me is first and foremost the limited downside. As long as the Redbox doesn't fall off a cliff and management stays reasonably committed to returning capital to shareholders your investment should be protected. Whether either of these things will happen is up for you to decide...but in the event of a significant market drop you will do quite well in the long run all else equal.

 

I don't agree with this reasoning! By this measure you'll be better waiting in cash for that possible sell-off.

 

I think that knowingly owning a business that's heading to obsolescense is risky. Just think of Blue chip stamps, amazing cash flow, great model, magnificent return on investment! If you are Buffett or Munger and control what to do with that cash flow then you may find your Sees and get an amazing return from that investment, but if you are a passive holder waiting for management to do the trick, I think you are in for some trouble.

 

You're always better off in cash IF you can predict when it will crash. I can't so I prefer to own things that will hopefully do better if/when it crashes.

One of the ways to do that is to find unique situations that have catalysts that are non-dependent on the economy to trade.

 

OUTR has been one of my favorites in that category. The return I expect to achieve is totally dependent on the trajectory of its decline and the rate/prices in which management repurchases shares. Both are generally not-correlated, or negatively correlated, with the state of the economy. There are upside catalysts with the discontinuation of ecoATM or developing a new product, but I prefer to just view things as they are. I can expect 8-10% for the status quo and more in the event that management/prices cooperate.

 

Also, I don't have to wait for the management to do anything. They're already doing it. They've repurchased 5+% of shares in the first 2 quarters alone and reduced some debt. They probably purchased another 2-3% this quarter and maintain a 2% dividend yield. And that's only about half of the FCF that they have committed to paying out. $60/share at this point is already largely different from $60/share at the beginning of the year.

 

In summary: The management is ALREADY DOING IT. The only thing they haven't really done yet is pull the plug on ecoATM which I imagine may be forthcoming - maybe as soon as the upcoming earnings release.

 

 

 

 

[rsmehta]

Anybody guesses on Q3 earnings??

 

    I'm really interested to see how much stock they bought back.

 

    Hoping they purchased a few million shares considering where the stock price has been trading much of this quarter(sub-$60).

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

 

    Q3 slate seems like it was weak this year, but Q4 is sizing up to be monstrous.

[AzCactus]

Why guess when we'll find out within an hour.  However, I will be VERY disappointed if this wasn't there biggest quarterly buy back of the year.  My hope (not guess) is $50,000,000 worth of stock. 

[TwoCitiesCapital]

Why guess when we'll find out within an hour.  However, I will be VERY disappointed if this wasn't there biggest quarterly buy back of the year.  My hope (not guess) is $50,000,000 worth of stock.

 

I'm hoping for a buyback within 3-5% of market cap (about your estimate of $50M) and hopefully the discontinuation of ecoATM. The quarter itself will probably be mediocre. If both of those happen, I'd be hugely bullish at $60 instead of moderately so.

 

 

 

 

http://finance.yahoo.com/news/outerwall-inc-announces-2015-third-200600800.html

Repurchased 938,586 shares of common stock for $60.8 million

YES!!!!! Looks like they're still running with ecoATM though. I guess I can't win everything.

[Larry]

Yea looks like they repurchased almost 1m shares, thats good and hopefully they will continue to buyback aggressively at these prices.

[AzCactus]

Funny how shares are down after hours.  Clearly shows that the market is inefficient--at least after 4:00 PM EST lol

[rsmehta]

In the first 3 quarters of 2015:

 

FCF: $205 mm

repurchased: 1.66 mm shares (9% of float outstanding)

reduced debt: by ~$100mm

Paid Dividends: $0.90 / share

 

    The thesis seems to remain in-tact.

 

    If they can repeat this sort of performance for another 24 months, this would generate a ton of value for shareholders.

 

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

Concerning about Q3 results:

 

    Total disc rentals went down by 23%(170mm -> 133mm) which is a bit concerning. Slate was very weak.

 

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

    They are hands down the Low-cost producer for new movie rentals(50% cheaper than VOD). This doesn't seem to be changing this anytime soon.

 

    This is setting up for a monster Q4 with the current movie slate

[AzCactus]

I usually avoid using absolutes.  But I can confidently say that anyone who was unhappy with management's performance during q3 should probably re-evaluate the reason(s) they purchased their shares to begin with. 

[flesh]

In the first 3 quarters of 2015:

 

FCF: $205 mm

repurchased: 1.66 mm shares (9% of float outstanding)

reduced debt: by ~$100mm

Paid Dividends: $0.90 / share

 

    The thesis seems to remain in-tact.

 

    If they can repeat this sort of performance for another 24 months, this would generate a ton of value for shareholders.

 

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

Concerning about Q3 results:

 

    Total disc rentals went down by 23%(170mm -> 133mm) which is a bit concerning. Slate was very weak.

 

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

    They are hands down the Low-cost producer for new movie rentals(50% cheaper than VOD). This doesn't seem to be changing this anytime soon.

 

    This is setting up for a monster Q4 with the current movie slate

 

Personally, I"ll be focusing on the disc rental decline % after we lap the price increase. For now, I"m reserving judgement but if disc declines continue anywhere close to 20% yoy after lapping the price increase, I'm out.

[rsmehta]

If they are the lowest cost option for new movie rentals by a large margin, there will be plenty demand for them to spin-off lots of cash given their model.

 

    When ^^that is no longer the case, it will get me concerned.

[flesh]

Was it 4th qtr 14' had the price increase for 1 out of 3 months or so and the first full quarter that included price increase was 1st qtr 15'?

[kab60]

Yes

[JayGatsby]

Few initial reaction to call. This was the first one with the new CEO so I was curious to try to get a read on him.

- Generally I like the way he framed growth ("pragmatic growth, disciplined growth, profitable growth"). Easy to say, so only time will tell

- Coinstar - I've never understood why Coinstar was only in the US and UK. I know the US is somewhat unique in that people don't actually use coins, but trying more markets will be interesting to see. I assume there was some reason they didn't pursue this growth previously.

- EcoATM - I like that they've stopped capex. They can play musical chairs with the existing boxes forever as far as I'm concerned. The one thing in the call that really gave me pause was the Gazelle acquisition. The good thing about it is this is clearly on the new CEOs watch, so there must be something he's seen at ecoATM that he finds promising. The bad things about it are i) it's further investment in a concept that hasn't shown any ROI, and ii) I don't really see how it fits in with their overall strategy given they've never done anything direct-to-consumer. Based on the Gazelle website it looks like the biggest benefit is it will vertically integrate ecoATM and give it an outlet to sell phones direct. To be honest, I don't know what OUTR does with all the phones now.

- Redbox - I like that they're pushing video games harder. I've always thought they could do better here. Frankly I think $3 a night is kind of steep, which may be part of the problem. If new games are $60+, I guess it's a fair price. Sounds like they've gotten some rev share agreements that increase availability. There is pretty limited competition here

- I'm fine with them using cash to repay debt.

 

Any other takeaways?

[frommi]

Funny how shares are down after hours.  Clearly shows that the market is inefficient--at least after 4:00 PM EST lol

 

My fair value has gone down from 80->62 with this release of new data. A 20% decline in rentals is nothing to be happy about, the numbers were very weak. Add to that the comments from the CEO and this will very fast develop into a value trap.

[JayGatsby]

Funny how shares are down after hours.  Clearly shows that the market is inefficient--at least after 4:00 PM EST lol

 

My fair value has gone down from 80->62 with this release of new data. A 20% decline in rentals is nothing to be happy about, the numbers were very weak. Add to that the comments from the CEO and this will very fast develop into a value trap.

I agree, but I think Q4 will be a good indicator of the staying power of the business. Q3 truly did have an awful slate. I try to check redbox.com every few weeks and there was barely anything I'd even heard of. There was some horror movie about Facebook that was in the most rented for weeks on end...  Are you referring to the CEO's comment that the secular trends accelerated?

[frommi]

Funny how shares are down after hours.  Clearly shows that the market is inefficient--at least after 4:00 PM EST lol

 

My fair value has gone down from 80->62 with this release of new data. A 20% decline in rentals is nothing to be happy about, the numbers were very weak. Add to that the comments from the CEO and this will very fast develop into a value trap.

I agree, but I think Q4 will be a good indicator of the staying power of the business. Q3 truly did have an awful slate. I try to check redbox.com every few weeks and there was barely anything I'd even heard of. There was some horror movie about Facebook that was in the most rented for weeks on end...  Are you referring to the CEO's comment that the secular trends accelerated?

 

No. He mentioned growth and didn't say anything about maximizing shareholder value per share. Capital allocation is in my view the most important thing here and he didn't even talk about it.

[rkluwer]

Capital allocation is in my view the most important thing here and he didn't even talk about it.

 

I think ur are wrong here.... he stated that the will keep on returning 75-100% of Cash to shareholders and that captital allocation still is in important, as the continue to buy-back shares and pay out dividendens. regarding the decrease in rentals, the can't be blamed by the weak box-office lately, so i thik we need to see Q4 before making in judgement here.

 

`The are still targeting 500 mio Ebitda, with 1,1 bio market cap and buying back shares, with around 295 mio still left to buy for. So around 25% at current lvl. I will sleep happy knowing this, and don't see the end of the redbox CF any time soon.

 

I like the way he talk about Coinstar and that the a trying this elsewhere and still see opptunities going fwd, but more important, not for every it takes, as he is not investing heavly into it. Also with recent purchase of Gazelle. It is small Investment - if u compare to Ecoatm purchase - so im not worried about all the CF beeing trown away.

 

The yoy decline in rentals don't get me worried, as i think the runaway from rentals will be much longer then most ppl think. We have had netflix etc for some time, and latest Netflix numbers didn't indicate any explosion in users, and VOD is still much more expensive then redbox, so why use it, when so Money ppl gotten use to redbox and it Works ?

 

i think the will buy-back 100m worth of shares in Q4 and the are allready doing this - the fluctation over the quater will be big, but value trap ?? - i see 10-15% compunding over 3-4 years in this. For me thats much better then the 5-10% i would love to get in the long run.

 

 

[TwoCitiesCapital]

Funny how shares are down after hours.  Clearly shows that the market is inefficient--at least after 4:00 PM EST lol

 

My fair value has gone down from 80->62 with this release of new data. A 20% decline in rentals is nothing to be happy about, the numbers were very weak. Add to that the comments from the CEO and this will very fast develop into a value trap.

I agree, but I think Q4 will be a good indicator of the staying power of the business. Q3 truly did have an awful slate. I try to check redbox.com every few weeks and there was barely anything I'd even heard of. There was some horror movie about Facebook that was in the most rented for weeks on end...  Are you referring to the CEO's comment that the secular trends accelerated?

 

No. He mentioned growth and didn't say anything about maximizing shareholder value per share. Capital allocation is in my view the most important thing here and he didn't even talk about it.

 

I was thinking through this last night to determine if I wanted to buy more and I kept thinking that the my entire return projection is based on the runway for redbox and the capital allocation decisions.

 

With that knowledge in mind, I have the following thoughts on each:

 

1) Runway is longer than most people realize for two reasons. There are no viable substitutes at this point in time and that it's likely that the video game rental market lasts even beyond the movie rental market given the lack of alternatives (i.e. buy a game for $60 a rent for a few $). Maybe movies only have 3 or so good years left, but video games will likely drive some incremental cash flow after that meaning that redbox doesn't just go to $0 in 3-4 years like many people would believe even if they accept the longer runway for DVDs. I'm glad to see them expanding video games.

 

2) Capital allocation can make or break this investment even with the longer runway. If they blow all of their buyback when shares are at $80-$100 per share, the chance of the residual value of FCF/share being worth anything decreases significantly. If they blow it all when shares are $50-$60 per share, they repurchase more shares, and the residual FCF per share is worth a whole lot more per share.

 

So, if you're the CEO, and you realize that capital allocation is one of the most important things to the long-term returns of your business, and the ability to execute on that capital allocation goes down as your share price rises, wouldn't you want to do everything in your power to prevent it from rising? I'm saying lowballing FCF estimates, not cancelling small projects that might eat a few million a quarter but are tiny relative to the impact they have on keeping the stock price low (like not cancelling ecoATM, but getting rid of all CapEx for it), etc. I'm not saying that's what he's doing - I'm just saying if I were CEO, I'd have an incentive to keep the stock price as low as possible for as long as possible to increase the probability of a great return for the residual company.

 

I don't know if that's the strategy he's taking, but it is one way to make sense of keeping ecoATM while not adding any new kiosks or CapEx. Also, hearing about the European expansion of coinstar excites me. Coinstar is an incredibly stable business even if we consider cash to be in secular decline. It will be a long-time before cash is completely gone. Also, the highest denomination of coin that is regular used in the U.S. is $0.25. In Europe, it's EUR 1.00. I'd expect to see transaction sizes in Europe come in a lot larger than the average transaction sizes in the U.S. just due to the higher denomination in the value of the coins. I'm surprised that Coinstar never expanded into Europe until now...

 

Also, for those who are doubting Q4 results (or, what I initially expected to be a real strong Q3), in response to a question about the company expecting the strongest sequential increase in rental volumes that we've seen, the CFO said the following:

 

One of the things that's driving that, Andy, is that you have such a dearth of content in Q3. And if you go back and you think about what's kind of happened in the last three quarters, right, each quarter has been a sequential decline in box office. So all of a sudden as you get into Q4, right, you are up to a lot more titles, right? You are up to over $3 billion in content, right?

 

You've got a number of blockbuster titles that we talked about, four of them present $1.8 billion. You've got a very heavy November release slate that's coming out; and we've really built up over the last couple of weeks a number of very good titles that have come.

[frommi]

To be fair, i only looked at the decline in rentals this quarter and was a bit shocked. In the past i looked at the decline rate of unique credit cards per quarter, because this number is roughly unaffected by the release slate. This is ~15% at the moment, which would lead to fair value of 72$ without any considerations for a european expansion of coinstar.

 

What holds me back to invest again here is that declines normally accelerate if they have started, so don`t expect the decline rates to be stable going forward. With Amazon and other VOD services now offering to download videos for offline view, i don`t see a use for DVD`s anymore, especially because most new computers/laptops don`t even have a player anymore.

The price argument is often mentioned, but when you factor in that most of the time you have to rent a disc for two days instead of 24h at VOD and the additional time/gas spent to return/get the discs its hardly a good argument alone.

[mcliu]

That's a good point. Netflix is only $8 a month, for Redbox if you rent a movie for 2 days each time, that's only 3 movies a month. Plus you have the inconvenience of returning it.. What's the value proposition? Are there movies that you can get on Redbox that you can't get on Netflix?

[TwoCitiesCapital]

That's a good point. Netflix is only $8 a month, for Redbox if you rent a movie for 2 days each time, that's only 3 movies a month. Plus you have the inconvenience of returning it.. What's the value proposition? Are there movies that you can get on Redbox that you can't get on Netflix?

 

Yes. New releases.

 

Netflix hasn't been good for movies since they've moved to streaming from the mail-order service. They have an infinite selection of crap when it comes to movies. They're only good for binge watching TV shows and one or two of their original series. As an Amazon prime member, the one time I browsed their selection of films, I didn't see much I wanted to watch.

 

If you want a new release, and have a DVD/BluRay/Xbox/PS then you're best, and cheapest, option for seeing new movies is Redbox.

[siddharth18]

First, a movie is released in theaters. A few months later, it heads to second-run outlets like airlines and hotel pay-per-view, and later it goes to Blu-ray, DVD and digital services that allow you to purchase or rent films à la carte.Then, about a year after a film’s theatrical release, trouble kicks in. That’s when a movie is made available to pay-TV channels like HBO, Starz and Epix. These premium periods are exclusive; when a movie gets to a pay channel, it often can’t be shown on any other streaming service. This usually means it gets pulled from à la carte rental services, too. Right now, HBO is showing “This Is 40,” “The Hobbit” and “Moonrise Kingdom,” among other titles. Because of the network’s exclusive hold over those titles, you can’t rent those films from any other digital service.Windowing also explains why Netflix’s movies feel so old. It takes about five to seven years after a movie first hits theaters for all its pay-window restrictions to expire. Only then does it become available to all-you-can eat services like Netflix.

Source: http://www.nytimes.com/2014/03/27/technology/personaltech/why-movie-streaming-services-are-unsatisfying-and-will-stay-so.html

[kab60]

Even with a suckass movie slate gross profit for Outerwall was up y/o/y. I'm still undecided about the CEO, but the longer the stock stays around 60 dollar the bigger the margin of safety. I hope they give the new guy a shitload of stock and forces him to read The Outsiders.