CSTR - Coinstar

[100 Shares]

Thanks for alot of great input in regards to the melting icecube. It's on my watch/research-list, but I'm still not comfortable plunging money into it. I'm cheap, and I'd like it to get (even) cheaper.

 

 

How cheap is cheap enough for you? What's currently in your portfolio that is even cheaper? I am always looking for more ideas  ::)

[cmlber]

New to this board.  I recently looked at OUTR so figured I'd share my thoughts.

 

My concern is, what happens when one day a studio says "I wonder what would happen if we released Spider Man 8 digital only?  Let's test it."  My fear is at some point in the not so distant future they will run a test like this and may find that most Redbox renters would stream if given no alternative (like me), and the majority of DVD purchasers would switch to buying digital.  If that were the case, the studios could simply stop producing DVDs, and the ice cube melts overnight.  To put some back of the envelope numbers behind it, Redbox likely rents out an average DVD 15 times, if only half of those convert to a streamed rental and the other half do something else with their night, I'd guess the revenue to the studios would be ~$2.5b (up to ~$5.0b if 100% convert to streaming) vs ~$1.0b from Redbox (my guess).  To put that in perspective, total US DVD sales were $7.8b last year.  I think the studios would clearly benefit from streaming only rentals, so the only cost in the cost/benefit analysis is lost DVD sales.  I would guess at least 50% of Redbox users would reluctantly choose to stream, so they could afford to lose at least 19% of DVD sales to people who wouldn't download a digital movie but would buy a DVD, and as DVD sales continue declining (the pace has been pretty rapid, dropping from 10.3b to 7.8b in three years), they can afford to lose a higher percentage of DVD sales.  Besides higher rental revenue, a digital only model also produces higher margins on digital sales compared to physical sales.   

 

Another step in between eliminating DVDs completely and status quo would be testing a large DVD price increase to shift demand to digital downloads (but still allow the DVD option) and force Redbox to pay more for content, which squeezes the value proposition and shifts more renters to streaming.  Another option would be increasing the window between digital download availability and physical DVD, which would hurt the Redbox model.

 

With that point of view, I don't think it's conservative to compare the market cap to FCF, because when the ice cube melts, the debt has to be paid back, it can't just be carried on the balance sheet and refinanced forever.  I think you should really be comparing unlevered FCF to the enterprise value in a case like this.  If you do that, with the price increase, it would take the core business (with no benefit or drag from eco atm) around 5 years to pay back your purchase price, not the 2-3 years you get when comparing levered FCF to market cap.

 

I don't know when this happens, but eventually it will.  It's likely far enough off that there is minimal downside and likely far enough off to leave substantial upside, but that risk is what has kept me from investing so far.  I tend to put more weight on the downside.  Anyone have a view on this risk?

 

[kab60]

Thanks for alot of great input in regards to the melting icecube. It's on my watch/research-list, but I'm still not comfortable plunging money into it. I'm cheap, and I'd like it to get (even) cheaper.

 

 

How cheap is cheap enough for you? What's currently in your portfolio that is even cheaper? I am always looking for more ideas  ::)

 

Well, whether it is cheaper only time will tell, but I like Clarke Inc/Holloway and Horsehead Holding at these levels. AIQ, Hyundai, GM and Seaspan as well. Even Vale. :)

 

I think there is a good chance Outerwall will work, but I just dont have enough conviction as these levels. The previous poster addressed some og my concerns as well.

[rishig]

Thanks for alot of great input in regards to the melting icecube. It's on my watch/research-list, but I'm still not comfortable plunging money into it. I'm cheap, and I'd like it to get (even) cheaper.

 

 

How cheap is cheap enough for you? What's currently in your portfolio that is even cheaper? I am always looking for more ideas  ::)

 

Well, whether it is cheaper only time will tell, but I like Clarke Inc/Holloway and Horsehead Holding at these levels. AIQ, Hyundai, GM and Seaspan as well. Even Vale. :)

 

I think there is a good chance Outerwall will work, but I just dont have slot og conviction. Think the previous poster addressed some og my concerns as well.

 

Add these numbers up and it is a pretty large revenue stream for the studios. Why would they not want to milk DVD sales as much as they can?

http://www.the-numbers.com/home-market/dvd-sales/2014

[pantheman]

My concern is, what happens when one day a studio says "I wonder what would happen if we released Spider Man 8 digital only?  Let's test it."  My fear is at some point in the not so distant future they will run a test like this and may find that most Redbox renters would stream if given no alternative (like me), and the majority of DVD purchasers would switch to buying digital.  If that were the case, the studios could simply stop producing DVDs, and the ice cube melts overnight.  To put some back of the envelope numbers behind it, Redbox likely rents out an average DVD 15 times, if only half of those convert to a streamed rental and the other half do something else with their night, I'd guess the revenue to the studios would be ~$2.5b (up to ~$5.0b if 100% convert to streaming) vs ~$1.0b from Redbox (my guess).  To put that in perspective, total US DVD sales were $7.8b last year.  I think the studios would clearly benefit from streaming only rentals, so the only cost in the cost/benefit analysis is lost DVD sales.  I would guess at least 50% of Redbox users would reluctantly choose to stream, so they could afford to lose at least 19% of DVD sales to people who wouldn't download a digital movie but would buy a DVD, and as DVD sales continue declining (the pace has been pretty rapid, dropping from 10.3b to 7.8b in three years), they can afford to lose a higher percentage of DVD sales.  Besides higher rental revenue, a digital only model also produces higher margins on digital sales compared to physical sales.   

 

Another step in between eliminating DVDs completely and status quo would be testing a large DVD price increase to shift demand to digital downloads (but still allow the DVD option) and force Redbox to pay more for content, which squeezes the value proposition and shifts more renters to streaming.  Another option would be increasing the window between digital download availability and physical DVD, which would hurt the Redbox model.

 

I think the belief that studios could switch overnight to a digital only model are a bit unrealistic. For one, we all know the studios are greedy. If they made the switch to digital only there wouldn't be anything stopping them from setting any price they want. There is no first sale doctrine (correct me if I'm wrong) for digital. So rentals are distributed through services like iTunes and Amazon Prime but the prices are set by studios. There is an inherent sensitivity to price of renters and I'm not sure the studios want to remove a viable revenue stream or audience set that Redbox provides. You also have to factor in movie sales and distribution outside US/Canada. As long as ex-N.A. sales are brisk (however that's defined) DVD's and Blu-Ray will have to continue being produced in some capacity.

 

Second, while broadband speeds in the more densely populated areas of the country are quite reliable and fast there is a large swath of the country with spotty and slow broadband. This is probably the greatest impediment to digital only. The individual also needs some type of box to play the movies on their tv. The boxes range from $35-$100 and you're essentially throwing out a box that cost just as much if not more to play your physical. Granted some tv's have built in Internet and apps and the price of the boxes will decrease over time.

 

Third, and I kind of see this as a paradox. Without DVD's to buy, more consumers may move to pirating and options to doing so are becoming easier and easier. Popcorn Time is the best example of this. It is essentially Netflix for newer pirated movies and tv shows and requires no downloads beside the software. On the other hand without physical copies it may be harder to find high quality pirated copies of movies online. Unless of course whatever DRM the studios choose (and they have to choose one because people want to be able to play their content without Internet access) is easily hacked, in which case it's probably easier to get a pirated version and now the pirated versions will become available instantly upon release.

 

I think it's most helpful to not even look at Redbox when analyzing the melting ice cube. You have to look at the studios and DVD/Blu-Ray sales. The margins on physical are still very good, over 50% net I believe. You also have to remember Netflix's lesson when they tried to split off their physical rental from streaming. There was an incredible backlash and Netflix was forced to do a very quick about face. I think the studios are in a very similar position and are very aware. If they push digital only too quickly they may have to reverse course and the damage done could be long lasting. On the other hand, I think right now they're trying to slowly push digital into the consumer mind. There's no doubt digital only is their end game it's just a matter of how long it takes for them to kick out the physical sales revenue. I see this taking at least 2-3 years for a consumer comfort stage and longer before physical is eliminated all together (think 5-10 years minimum). Just look at how long after dvd was the norm that VHS lasted. First DVD movie released was in 1996 (Twister). DVD sales didn't top VHS until 2002. The last VHS movie to be released was in 2006.

[frommi]

When you think the market has priced this company efficient before the press release, than how can a possible >60% increase in earnings be priced into the stockprice with just a 10% movement?

This can only be right when the market had this already factored in. But is it reasonable to assume that the market thought they would increase prices this december by more than 20% and not discount this possibility in any way?

I think the market has not nearly factored in the last press release (or realized the possible earnings increase in excess of 25%), and this has nothing to do with declining revenues or future DVD sales.

 

And when you look at OUTR as only Redbox you are missing half the picture because Coinstar and ecoATM are surely not worthless. (They pretty much cover all the debt.)

[yadayada]

I think there are a lot of irrational speculators in this one. They want to see redbox is not dying. I think sometimes the market gets it in their head a business will suddenly die. Look at best buy. It crashed to like 3-4x FCF. Then next year they did the same amount of revenue, and it shot up to 10x FCF. Same thing will probably happen here. at the very least it should trade at 8x 250m$ = 2 billion$. A 2 billion$ valuation either prices in redbox doesn't die next year, or new ventures will make some money.

 

I think the market does not like the buybacks here. Which seems very irrational. Why would you like it with dividends? You would be buying a overvalued stock for the dividends, which is stupid.

 

[shhughes1116]

I think there are a lot of irrational speculators in this one. They want to see redbox is not dying. I think sometimes the market gets it in their head a business will suddenly die. Look at best buy. It crashed to like 3-4x FCF. Then next year they did the same amount of revenue, and it shot up to 10x FCF. Same thing will probably happen here. at the very least it should trade at 8x 250m$ = 2 billion$. A 2 billion$ valuation either prices in redbox doesn't die next year, or new ventures will make some money.

 

I think the market does not like the buybacks here. Which seems very irrational. Why would you like it with dividends? You would be buying a overvalued stock for the dividends, which is stupid.

 

 

It is not stupid.  Although buybacks can be a useful tool, they are "hidden" by nature.  All the shareholder sees is the decline in the share count at the end of the quarter.  Although maybe not the best allocation of free cash flow in this instance, a dividend is a more public affirmation of the company's ability to distribute free cash flow to shareholders, which the market tends to like.  Additionally, a dividend would start to attract a broader investor base (i.e. those screening for  dividend-paying stocks), as opposed to simply the deep value crowd. 

 

I would personally like to see them pay out about 15% of free cash flow as dividend, and continue to use remainder for stock buybacks.  With $220 million free cash flow and 18.9 million shares, paying out 15% of free cash flow would result in a dividend of ~2.5%.  Not only would this be a more public way to show that they are generating and returning free cash flow, but it would make it more costly to sell shares short, which would probably result in a nice short squeeze as shorts capitulate. 

[siddharth18]

Any company-specific news here? Up almost 6% on relatively-normal volume...

[gfp]

Very high short interest is the likely cause.  Someone somewhere probably recommended the shares, but short covering can feed on itself at these price levels.

 

Any company-specific news here? Up almost 6% on relatively-normal volume...

[Travis Wiedower]

Very high short interest is the likely cause.  Someone somewhere probably recommended the shares, but short covering can feed on itself at these price levels.

 

There was a brief bullish article on thestreet.com so maybe that. No company-specific news I'm aware of.

[pantheman]

Looks like Sony is going to give us a glimpse of the future here. The conspiracy theorist in me wonders if this whole hacking incident was contrived just to get a big first run movie out online. With all the publicity surrounding this, the "box office" numbers coming out late Sun/Mon morning are going to be eagerly awaited. Also surprised they didn't price at $9.99 considering it's first run. All in all a great case study for what will be the future...at some point.

 

http://mobile.bloomberg.com/news/2014-12-24/sony-s-the-interview-goes-online-at-google-youtube.html

[frommi]

Looks like Sony is going to give us a glimpse of the future here. The conspiracy theorist in me wonders if this whole hacking incident was contrived just to get a big first run movie out online. With all the publicity surrounding this, the "box office" numbers coming out late Sun/Mon morning are going to be eagerly awaited. Also surprised they didn't price at $9.99 considering it's first run. All in all a great case study for what will be the future...at some point.

 

http://mobile.bloomberg.com/news/2014-12-24/sony-s-the-interview-goes-online-at-google-youtube.html

 

I thought it was a very good marketing campaign. :)

But as long as the studios make lots of money with DVD`s and blurays i don`t see a problem for OUTR. This is more a threat to cinemas, Netflix or AMZN, when the studios publish on their own internet channels.

[thefatbaboon]

Of course Redbox is a melting icecube, but the question is how long it takes to melt it away. The market and the shorts say it happens very soon (<3 years), but i don`t think it will happen that fast when you look at their recent past. When EBITDA from redbox shrinks every year by 10-20% this company is a steal at these prices. (Or i am too stupid to do the math.)

 

This years numbers are a bit weak not only because people are looking more films online but also because of the weak box office release in the summer which can mainly be attributed to the world championchip in soccer. I watched a lot of movies in october and november so this quarter is probably a lot better than the last.

I am really sad that i don`t have access to Redbox in germany since i am pretty sure that i would use it regularly, not only because looking new cinema films on ITunes/Netflix/Amazon is expensive but also because you can get the newest films on DVD first. As long as the studios have their release windows set up that way, Redbox has a big advantage. I am pretty sure that as long as the release windows stay that way revenue/EBITDA will not decrease faster than i said above.

 

I am so bullish because i am sure that the next year is enough to kill every shorty in this stock. You can make scenarios with the price increase but since they have made tests i don`t think that less people will use their service because of the price increase, so you can expect that a lot of the price increase will fall to the bottom line. The very optimistic view would be that the complete 25% of 2 billion fall through to FCF, which would be a 500 million $ increase in FCF, which would mean an FCF of around 780 million $. But even the not so optimistic view of a 15% increase in revenue means 300 million $ more FCF so around 580 million $. Or you take yadas numbers of 100-150 million more and land around 420 million FCF $.

 

So around 420-780 million FCF in just one year on a marketcap of 1300 million with 45% of the float sold short (1 week back the calculation was just 250-280 million FCF). I can`t help but see this skyrocket especially when the price advances over the top at around 75$. I am pretty sure that a lot of short sellers have stops in the market at that number.

 

And for the long term view you have coinstar which gives a good terminal value and a floor to pay down debt and ecoATM which has a huge potential for free.

 

But who knows maybe i am wrong or have a big flaw in my logic, that would not be the first time.

 

Frommi, here we go, over $75!  Let's hope we have a nice run to $100.

[rsmehta]

Outerwall CEO Di Valerio Steps Down

 

  down over 12%

[frommi]

Outerwall CEO Di Valerio Steps Down

 

  down over 12%

 

Not funny, but the numbers don`t look that bad.

[rsmehta]

Outerwall CEO Di Valerio Steps Down

 

  down over 12%

 

Not funny, but the numbers don`t look that bad.

 

It makes no sense why he stepped down...Still trying to figure it out.

 

    I really hope the new CEO is still committed to the buybacks and returning "75%-100% of FCF back to shareholders".

 

  My investment in OUTR was very central around this.

[plusalpha]

News Release by Outerwall

 

http://phx.corporate-ir.net/phoenix.zhtml?c=92448&p=irol-newsArticle&ID=2008790

 

[Guest roark33]

I would guess it is the results or internal forecasted results of ecoATM.  Or maybe an employee mistress...:)

[jmoy911]

Very abrupt change to axe the CEO if it was just due to internal forecasted results.. my bet is on the latter guess.

 

I would guess it is the results or internal forecasted results of ecoATM.  Or maybe an employee mistress...:)

[thefatbaboon]

Very abrupt change to axe the CEO if it was just due to internal forecasted results.. my bet is on the latter guess.

 

I would guess it is the results or internal forecasted results of ecoATM.  Or maybe an employee mistress...:)

 

I hope it's a mistress or crack or something non-business related.  I hate these releases that tell one nothing.

[ATLValue]

Is anyone adding / starting a new position today? Looks like a very good opportunity to sell some puts

[siddharth18]

I actually don't know what to make of today's event. We're being told the CEO is leaving and at the same time not being told why. On one hand...CEO doesn't leave for no reason...on the other hand we don't really know what the reason is.

 

So as far as speculating the reason why he's leaving...are the results going to be so bad that he left before being kicked out? One reason could be that SSS for the kiosks dropped off massively after the price boost. Or something unsavory was discovered within the company that forced him out?

[Picasso]

One reason could be that SSS for the kiosks dropped off massively after the price boost.

 

This seems like the most likely.  The price increase was sudden and took away a lot of value proposition from renting from a kiosk.  If that ends up being true, it becomes really tricky to value a melting ice cube with no pricing power and I'm sure the market isn't going to like the results.  I believe shares were at $57 before the price increase?  The stock is still trading a bit above that level to maybe discount the "I-slept-with-the-CFO's-wife" theory.

 

I am just waiting for the optimistic bulls to come out and say they made the announcement vague to be able to repurchase a lot of shares on the cheap.  Maybe they'll keep kicking out a bunch CEO's to make it really easy to gobble up the float.

[shhughes1116]

One reason could be that SSS for the kiosks dropped off massively after the price boost.

 

This seems like the most likely.  The price increase was sudden and took away a lot of value proposition from renting from a kiosk.  If that ends up being true, it becomes really tricky to value a melting ice cube with no pricing power and I'm sure the market isn't going to like the results.  I believe shares were at $57 before the price increase?  The stock is still trading a bit above that level to maybe discount the "I-slept-with-the-CFO's-wife" theory.

 

I am just waiting for the optimistic bulls to come out and say they made the announcement vague to be able to repurchase a lot of shares on the cheap.  Maybe they'll keep kicking out a bunch CEO's to make it really easy to gobble up the float.

 

Oh good lord, the price hike did not take away a lot of the value proposition associated with renting from the kiosks.  And seriously, stop prognosticating on why the CEO left.  No one here has any inkling why he left, and no one here will know anything about it until they release more  specific information.  Speculating about it is a fools errand. 

 

The interim CEO predates the JANA stake and shake-up.  Read into that what you want, particularly with respect to how free cash flow will be deployed going forward.