CSTR - Coinstar

[premfan]

Hi fellow investors its been awhile since i shared an idea with the board.  Coinstar is the owner of redbox.  Since Q1 2009 redbox has been the full owner of this beautiful red machine . 

 

Positives

- 37 percent market share of physical dvd industry.  No competition in physical dvd market

- Expanding into canada

-  Same store stales for each kiosk    2009 27.3 %,  2010 13 %, 2011 18.3  %  ( Find me any retailer with same store sales like this?)

- Partnered with verizon early this year to form streaming company

- Partnered with starbucks to create "rubi" a one dollar coffee kiosk serving seattles best coffee.

- New venture business line created in 2011. Ecoatm in the pipeline ( I  think this is the next huge winner)

 

Risks

- Heavily shorted

- Trend towards streaming content

 

Valuation

- Its a garp right now not value stock.

 

Conclusion

 

A friend told be the key to creating wealth is leveraging an idea or product until it doesnt work anymore. Along the way plant seeds that hopefully you can leverage in the future. His guy is a founder of a multinational company. I think redbox has much room for growth in same store sales and # of units. I love that management is planting the seed with the new streaming company and other kisok ventures when the time comes when redbox slows down. Managment really seems proactive instead of reactive .

 

Disclosure : Coinstar is my largest position

[TheEnterprisingInvestor]

Hi fellow investors its been awhile since i shared an idea with the board.  Coinstar is the owner of redbox.  Since Q1 2009 redbox has been the full owner of this beautiful red machine . 

 

Positives

- 37 percent market share of physical dvd industry.  No competition in physical dvd market

- Expanding into canada

-  Same store stales for each kiosk    2009 27.3 %,  2010 13 %, 2011 18.3  %  ( Find me any retailer with same store sales like this?)

- Partnered with verizon early this year to form streaming company

- Partnered with starbucks to create "rubi" a one dollar coffee kiosk serving seattles best coffee.

- New venture business line created in 2011. Ecoatm in the pipeline ( I  think this is the next huge winner)

 

Risks

- Heavily shorted

- Trend towards streaming content

 

Valuation

- Its a garp right now not value stock.

 

Conclusion

 

A friend told be the key to creating wealth is leveraging an idea or product until it doesnt work anymore. Along the way plant seeds that hopefully you can leverage in the future. His guy is a founder of a multinational company. I think redbox has much room for growth in same store sales and # of units. I love that management is planting the seed with the new streaming company and other kisok ventures when the time comes when redbox slows down. Managment really seems proactive instead of reactive .

 

Disclosure : Coinstar is my largest position

 

Can you help me understand why any service provider would want to strike a streaming deal with them? 

[premfan]

Verizon wants a piece of the streaming content market. Coinstar is a distribution of content company. This creates a synergy between the two. Coinstar needs streaming content to compete in the future. Verzion has streaming content and wants a way to distribute the content.  Revenue sharing model and creates a win/win. The question is does verizon have good content?

[TheEnterprisingInvestor]

Verizon wants a piece of the streaming content market. Coinstar is a distribution of content company. This creates a synergy between the two. Coinstar needs streaming content to compete in the future. Verzion has streaming content and wants a way to distribute the content.  Revenue sharing model and creates a win/win. The question is does verizon have good content?

 

They're basically distributing physical content on a 28 day delay under the first-sale doctrine.  I just don't see how this creates any advantage in streaming or why a Verizon would need them at all to purchase streaming rights from studios and pipe them into homes.  I don't see what Coinstar brings to the table there and why VZ would share revenue.  I'm very much hoping to understand this because if there is credible opportunity then it might well be undervalued. 

 

I think of CSTR as a NPV on the life of Redbox and CSTR Kiosks with an option on whatever new kiosk they're going to roll out (the deal w/ Seattle's Best for example).  I just have no idea how long the CF lasts on the first two businesses or what to value the options at. 

[mankap]

Starbucks tie up looks very interesting.

What do you think is the upside from Starbucks tie up.

[premfan]

Management is going to roll out 500 rubi's by years end and a goal of 15k by 2015. I dont know how the market place will respond to it. All the other ventures outside of redbox is like a free option call on the company. The simple thesis for coinstar is :  # of unit growth of redbox vs pricing power.  Management states 60k is market saturation of tier 1 locations in the u.s. for redbox. Right now currently about 40k redbox in u.s. its going to take another 4 years to reach 60k saturation.  Margins will increase this year due to price increase of 1.00 to 1.20. Demand still was high even with the price increase.  Main question is in 4 years will physical dvd demand drop significantly  or become extinct? If you think yes then no reason to invest in company. I feel comfortable management is proactive instead of reactive. They are forward thinkers and are partnered with some of the best businesses in the world. Also recently partnered with family dollar as well.  Heres the best article i have ever read on the economics of the company :  http://seekingalpha.com/article/346371-why-coinstar-will-earn-over-5-00-in-eps-in-2012

[premfan]

50 percent of the float is short. Something has to give here. Short squeeze or crash its a fairly binary situation. Coinstar is my largest position.

[siddharth18]

Hi Premfan,

 

I too am long CSTR (since 2010 actually). The ride has been euphoric at times, followed by a depressing sell-of but essentially the stock has gone nowhere when you compare it with the index. Anyway, I too think that the death rumor of DVD are exaggerated. The pricing power they have in DVD is just monopolistic (people still would rent DVDs if they raised prices by 10 cents a year).

 

As for streaming, I don't think it will experience jaw-dropping success or even prove as a formidable competitor to NFLX. I'm more optimistic about the coffee machine. I also like the share-holder friendly management and their decision to buyback shares in the 40's and raising money via bonds to increase buyback.

 

Given the short interest, CSTR is basically waiting to explode (or implode) on earnings day.  Having said that what is your price target on this?

 

Cheers!

[premfan]

Hi Sid,

 

Current IV for me is 85-90 dollars a share.  I love the business model ( huge operating leverage) and i like the venture side of the business ( huge pipeline of kiosk concepts ala ecoatm and rubi).  I can easily see 2013 earnings being over 6 dollars a share.  I dont feel wall street gets the  operating leverage of their business model.

[siddharth18]

Hi Sid,

 

Current IV for me is 85-90 dollars a share.  I love the business model ( huge operating leverage) and i like the venture side of the business ( huge pipeline of kiosk concepts ala ecoatm and rubi).  I can easily see 2013 earnings being over 6 dollars a share.  I dont feel wall street gets the  operating leverage of their business model.

 

Thanks for reply. Yes it has strong operating leverage and management is working hard to not rest on their laurels. I think the short selling is incited by Jim Chanos. Even in the face of increase in Rev and EPS the shorts have been mercilessly hammering the stock down.

 

For instance, last quarter, the revenue PER kiosk was down, but shorts failed to realize that when you add two kiosks (on busy locations) instead of one kiosk per location, the revenue per kiosk could go down but the TOTAL revenue from that location goes up.

[Packer16]

There are shorts but the LEAP call options are not cheap (compared to other undervlaued firms like BAC) leading me to believe that there are some bullish bets also on this firm.  I like the disruptive technology of CSTR and its cheaper than NFLX.  BTW has anyone looked at the LEAPs?  What do you think the timing of the binary event will be? TIA.

 

Packer 

[premfan]

There are shorts but the LEAP call options are not cheap (compared to other undervlaued firms like BAC) leading me to believe that there are some bullish bets also on this firm.  I like the disruptive technology of CSTR and its cheaper than NFLX.  BTW has anyone looked at the LEAPs?  What do you think the timing of the binary event will be? TIA.

 

Packer

 

Packer,

 

The binary event could be when the company reveals the economics of redbox instant. I have to double check but i'm thinking it will be in Q2 .  Its currently trading at 10x owners earnings.  Its cheap and management is using excess cash to buyback shares.  In these unsustainable vs sustainable battles the catalyst is perceived sustainability. Usually their is an event that happens that changes everything. Wall street can then  start modeling again.  Wall street is funny cause when they cant model they go in default mode saying its unsustainable ( business in the real world isnt linear). So thinking out loud i would say when they reveal the economics of redbox instant that is the binary event. With that said coinstar is a automated retail solutions company and not a dvd company. It just happens that redbox is a massive success and they had to expand. They have other concepts that they will roll out this year and the next few years. Over time the redbox revenue will be at a lower percent of total revenue. Regarding LEAP call options i havent looked and its not in my COC.  Let us know if the LEAP's look good.

[siddharth18]

There are shorts but the LEAP call options are not cheap (compared to other undervlaued firms like BAC) leading me to believe that there are some bullish bets also on this firm.  I like the disruptive technology of CSTR and its cheaper than NFLX.  BTW has anyone looked at the LEAPs?  What do you think the timing of the binary event will be? TIA.

 

Packer

 

I think timing the binary event, outside of saying it will be when results are announced - we just don't know if it will be Q1 results or Q2 results or Q3 results or Q4 results, would be speculation. What we do know for sure is that if they miss the quarterly estimates by even a penny the stock will go to low $40's.

 

Having said that I'm not comfortable buying at these prices (high 50's). I sold a bunch around $58. I will patiently wait for more negative news to erupt.

[AchilliesValue]

I bought the common after the price tanked last fall.  My thesis was pretty simple.

 

1) Its priced to die (EV / FCF of around 5 at the time) and a lot of people think so (~40% short interest), but it has improving Revs, FCF, and, CROIC.

2) It has a compelling customer value proposition. It is pretty much the only place you can get new movies for cheap. Netflix & Amazon Prime focus on tv shows.

3) Even if / when it does begin to die its not a Blockbuster with high fixed costs in a set location. They can pick up unprofitable kiosks and move them. Content and "kiosk rent" are largely variable, and 1 employee can service something like 20 kiosks. 

 

I'm not a big fan of the "new ventures" segment. I think Rubi has potential and Redbox Instant might work if they continue the focus on movies but I'd rather see them launch a massive buyback with the cash. This potential waste of capital is my main concern that I'll monitor closely.  They guided 200 Mil in FCF this year and were very conservative last year.

 

Also curious to see the impact of the new content agreements that pushed holiday releases from Q4 to Q1.  Management claims that it should just change the seasonality but I think a lot more movies are rented around the holidays so not sure I buy that.

[siddharth18]

I bought the common after the price tanked last fall.  My thesis was pretty simple.

 

1) Its priced to die (EV / FCF of around 5 at the time) and a lot of people think so (~40% short interest), but it has improving Revs, FCF, and, CROIC.

2) It has a compelling customer value proposition. It is pretty much the only place you can get new movies for cheap. Netflix & Amazon Prime focus on tv shows.

3) Even if / when it does begin to die its not a Blockbuster with high fixed costs in a set location. They can pick up unprofitable kiosks and move them. Content and "kiosk rent" are largely variable, and 1 employee can service something like 20 kiosks. 

 

I'm not a big fan of the "new ventures" segment. I think Rubi has potential and Redbox Instant might work if they continue the focus on movies but I'd rather see them launch a massive buyback with the cash. This potential waste of capital is my main concern that I'll monitor closely.  They guided 200 Mil in FCF this year and were very conservative last year.

 

Also curious to see the impact of the new content agreements that pushed holiday releases from Q4 to Q1.  Management claims that it should just change the seasonality but I think a lot more movies are rented around the holidays so not sure I buy that.

 

Good thesis AchilliesValue; thanks for posting. They aren't betting the farm on new ventures which hints at how conservative the management is. Also they did raise money via bonds to buyback shares. I feel like this management is definitely better than average in the sense that they have a good idea of when/how to buyback shares.

 

One thing I liked was how they increased the capacity of their machines so they hold more disks per kiosks than before.

 

Cheers!

[Packer16]

As I understand the bear case, it is in part based upon declining video rental volume (which could be masked by a pricing increase).  As of 4Q 2012, the rental revenue did not decline on an overall basis but declined on a SSS basis as the number of kiosks and locations increased.  We will see what Q1 and Q2 2013 brings.  A good sign is Larry Sarbit holds a large stake in CSTR, he is a concentrated value investor from Canada.

 

Packer

[AchilliesValue]

Siddharth, when I saw the press release I just assumed the notes offering was to redeem the convertible debt that is due in 2014 and I think has been a bit of an overhang on the stock. But now that I checked it seems that there's only $184 Million outstanding so you may be right. Also while I'm a skeptic about their new products I thought their analyst day was very impressive and their focus on ROIC has been outstanding (improved from low single digits to mid teens).

 

Packer, in regards to the bear case I've been taking the SSS numbers with a grain of salt for the time being.  They had record installs in Q3, are dealing with the NCR acquisition and kiosk conversion, plus sales in the movie business tend to be a little lumpy based on content (might explain why the LEAPs are expensive but I haven't looked at them). They also started doubling up the kiosks at some popular locations that needed additional inventory which increases overall sales but hurts SSS.

 

Q1 is going to be interesting.  I think a lot of the good content was delayed til the back half of the quarter which might lead to a miss.

[Shawn]

Eeehhhh I think you can find better *shrugs*

[siddharth18]

Eeehhhh I think you can find better *shrugs*

 

Not bad results. Nothing jaw-dropping either way - good or bad. I think the short term traders exited due to the lack of action following the results. Company is still executing. Any thoughts what's next? Till next quarter?

[siddharth18]

Having said that I'm not comfortable buying at these prices (high 50's). I sold a bunch around $58. I will patiently wait for more negative news to erupt.

 

Well...Ask, and Ye Shall Receive:

 

8-K: http://www.sec.gov/Archives/edgar/data/941604/000119312513367866/d598610dex991.htm

 

-Management offered too many freebies to juice up the comps...

-No update on RUBI

-More buyback coming

-Expected revenue growth of 4-7% till 2015.

 

http://finance.yahoo.com/news/outerwall-shares-fall-cutting-outlook-225821592.html

 

http://www.reuters.com/article/2013/09/16/outerwall-forecast-idUSL3N0HC37S20130916

 

Shares drop to $45 in after hours trading:

 

 

http://i.imgur.com/WrjojIR.png

 

Enterprise value = ($45*28M shares o/s) - $380 Cash/ST Investments + $510 LT Debt = $1.4B

 

Adjusted EBITDA of ~$451M-$471M for 2013.

 

Would be naive to buy/sell on numbers alone without considering the bigger picture...Wondering what the normalized growth/decay would've been for this quarter without the freebie induced distortion...Thoughts?

[Green King]

 

A good sign is Larry Sarbit holds a large stake in CSTR, he is a concentrated value investor from Canada.

 

Packer

 

how can you tell his current holdings? i think he did last year but not anymore.

 

http://www.iaclarington.com/en/products/mutual-funds/us-funds/sarbit-us-equity-fund-t6.aspx

http://www.iaclarington.com/en/products/mutual-funds/us-funds/sarbit-us-equity-fund-(us$)-t6.aspx

http://www.iaclarington.com/en/products/mutual-funds/corporate-class-funds/sarbit-us-equity-class-t6-(unhedged).aspx

http://www.iaclarington.com/en/products/mutual-funds/corporate-class-funds/sarbit-us-equity-(us$)-class-t6-(unhedged).aspx

http://www.inalco.com/pdf/fonds/english/ecoflex/Ecoa-FU554x.pdf?11

[siddharth18]

I may just be talking to myself here, but Outerwall (f/k/a Coinstar) finally sees light of the day:

 

http://www.reuters.com/article/2013/10/04/us-outerwall-idUSBRE99310020131004

 

Jana Partners takes large stake in Redbox operator Outerwall

 

(Reuters) - Activist investor Jana Partners LLC reported a 13.5 percent stake in Outerwall Inc (OUTR.O) and said it intends to explore options, including a possible sale, for the operator of the Redbox video rental kiosks.

Gotta be painful for the shorts - around 30% of float is SHORTED.

 

I was hoping for more negativity and enter around $40/share but that was too late.

[AchilliesValue]

Your not the only one I still have a position.  Not a huge fan of activists but I like this one as I'd rather own a slowing dying FCF cow then one plowing its cash into new VC adventures. Curious to see what the cash flow potential of this business is if you turn off the growth capex and hope Jana can help make that happen. Honestly lucky timing for me I was planning to reevaluate my position this weekend as I had concerns management would blow the cash flow.  Now can do it under happier circumstances.

[siddharth18]

Your not the only one I still have a position.  Not a huge fan of activists but I like this one as I'd rather own a slowing dying FCF cow then one plowing its cash into new VC adventures. Curious to see what the cash flow potential of this business is if you turn off the growth capex and hope Jana can help make that happen. Honestly lucky timing for me I was planning to reevaluate my position this weekend as I had concerns management would blow the cash flow.  Now can do it under happier circumstances.

 

Yeah. Someone who bought in last three years has made little money on this roller-coaster and effectively lost money considering how much this sucker has lagged the index. The longs have been praying for a short-squeeze that never materialized and management has its hands full maintaining the status-quo and a bit slow in executing/innovating.

 

I sold out around $60's couple months ago but don't really want to touch it again at these prices.

 

As for management capital allocations - they do love buybacks!

[siddharth18]

Hey AchilliesValue, are you still long?

 

They just completed a tender for over 5 million shares ~20% of shares outstanding!

 

So the current market cap is $1.4 Billion + long term debt and leases of $800M (EV of $2.2B), they are guiding EBITDA is ~$500M so EV/EBITDA of ~4.4 ?

 

Depreciation (in 2013) was $160M and maintenance capex going forward is ~$60M, interest of around $25M.

 

So my rough estimate of FCF is around $290M, for a FCF yield on equity of 20%

 

$500M EBITDA - $60M maintenance capex (from guidance) - $25M interest (from 10K) - $125M taxes (39% effective tax rate).

 

Thoughts?

 

 

There isn't much organic growth on the top-line so the only way to increase it would be by bumping up the rent price. But considering how there are no alternatives to Redbox - they have a pretty good pricing power and all cap-ex will will remain fixed, so any increases in rent will fall to the bottom-line.

 

I think there is a huge segment of the population who would rather pay Redbox $1.2 for a DVD (or $1.6 for a blu-ray) rather than pay $4-$5 to an online streaming service. Hence, RedBox should have no problem increasing rent by 5-7% per year going forward. Too, there isn't any other company looking to compete with Redbox's kiosks anytime soon. Blockbuster is bust and Netflix is running as far and as fast as it can, from DVDs.

 

With Jana partners turning up the heat, it's very likely that management won't be reckless with their capital allocation plan. FWIW, management has already axed some "new ventures" and promised 75%-100% return of FCF to shareholders.