CSTR - Coinstar

[rsmehta]

My money is on extra marital affair or something of the sort...

 

A great CEO for shareholders, but at the same time, just look at the guy.

 

 

Has goofy creepster written all over him.

[Picasso]

I love how this thread went from "over $75, next stop $100! Choo, choo!" to posting creepy pics of the old capital allocator in chief and speculating on the reasons for his demise.

 

As far as the speculation goes, we should be speculating on what might have happened.  I mean the shares are down 20% for a reason.  Then again this stock seems to trade within a wide band of outcomes. 

[thefatbaboon]

Isn't the big "known" negative from the release this:

 

"Outerwall will provide 2015 annual guidance on its upcoming fourth quarter 2014 earnings conference call.  The company currently expects low single-digit revenue growth and core adjusted EBITDA from continuing operations to be approximately in-line with expected 2014 actuals."

 

Unless I'm missing something this suggest something is going very wrong.

 

Redbox price increase +25%

ecoATM supposed to have +2000 installed from beginning of year.

 

...So EBITDA flat??

 

[KCLarkin]

"Outerwall will provide 2015 annual guidance on its upcoming fourth quarter 2014 earnings conference call.  The company currently expects low single-digit revenue growth and core adjusted EBITDA from continuing operations to be approximately in-line with expected 2014 actuals."

 

Unless I'm missing something this suggest something is going very wrong.

 

Redbox price increase +25%

ecoATM supposed to have +2000 installed from beginning of year.

 

...So EBITDA flat??

 

Yes, that does sound like grounds for dismissal. But why did they ever hire such a creepy looking guy?

[rsmehta]

Why is this so terrible???

 

    There is probably an avg. of 21M shares outstanding for 2014, and there will probably be an average of 16.5M shares outstanding for 2015.

 

    Your EPS and cashflow per share figure goes up 25% just based on this.

 

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

 

    Low-to-single digit growth of EBITDA would be what any conservative CEO would say.

 

    Even though the movie slate in 2015 is suppose to be monstrous, under-promise and over-deliver tends to be the approach with corporate america nowadays.

 

 

 

 

Isn't the big "known" negative from the release this:

 

"Outerwall will provide 2015 annual guidance on its upcoming fourth quarter 2014 earnings conference call.  The company currently expects low single-digit revenue growth and core adjusted EBITDA from continuing operations to be approximately in-line with expected 2014 actuals."

 

Unless I'm missing something this suggest something is going very wrong.

 

Redbox price increase +25%

ecoATM supposed to have +2000 installed from beginning of year.

 

...So EBITDA flat??

[thefatbaboon]

"Outerwall will provide 2015 annual guidance on its upcoming fourth quarter 2014 earnings conference call.  The company currently expects low single-digit revenue growth and core adjusted EBITDA from continuing operations to be approximately in-line with expected 2014 actuals."

 

Unless I'm missing something this suggest something is going very wrong.

 

Redbox price increase +25%

ecoATM supposed to have +2000 installed from beginning of year.

 

...So EBITDA flat??

 

Yes, that does sound like grounds for dismissal. But why did they ever hire such a creepy looking guy?

 

Originally CFO, so creeped his way in the back door.

[thefatbaboon]

Why is this so terrible???

 

    There is probably an avg. of 21M shares outstanding for 2014, and there will probably be an average of 16.5M shares outstanding for 2015.

 

    Your EPS and cashflow per share figure goes up 25% just based on this.

 

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

 

    Low-to-single digit growth of EBITDA would be what any conservative CEO would say.

 

    Even though the movie slate in 2015 is suppose to be monstrous, under-promise and over-deliver tends to be the approach with corporate america nowadays.

 

 

 

 

Isn't the big "known" negative from the release this:

 

"Outerwall will provide 2015 annual guidance on its upcoming fourth quarter 2014 earnings conference call.  The company currently expects low single-digit revenue growth and core adjusted EBITDA from continuing operations to be approximately in-line with expected 2014 actuals."

 

Unless I'm missing something this suggest something is going very wrong.

 

Redbox price increase +25%

ecoATM supposed to have +2000 installed from beginning of year.

 

...So EBITDA flat??

 

er...not sure if you being serious?

 

+25% price hike & all the new ecos and flat EBITDA.  That implies massive declines.  And that is for a year when many (myself included) thought we'd have a little recovery from 2014 weak slate issues.  Instead the implication is that all the new ecos adds nothing in ebitda and the 25% price hike is completely offset by a 20% volume decline.  If that is even near the truth then the situation is significantly worse than I thought.  How long until there is no Redbox if this is the underlying volume trend?

[merkhet]

Originally CFO, so creeped his way in the back door.

 

+1 just for the well crafted sentence :)

[jmoy911]

http://deadline.com/2015/01/surprise-ceo-change-redbox-stock-fall-1201353752/

[rsmehta]

I would be very surprised if this was grounds for removal.

 

1. They are gonna beat on eps figures. They are gonna beat on FCF.

 

2. They had macro headwinds(Movie slate was very weak), and price hike was only effective in December

 

3. Companies may guide up or down, but almost always you need consistently poor performance(and not just guidance) for a change in CEO.

 

    Look at a lot of other poor performing companies around you, and see how long it takes for a board to fire a CEO.

 

    My money is on something personal he did.

 

[siddharth18]

Hahaha I love how the CEO's picture was "viewed 22 times"...looks like some folks are actually finding clues to either prove/vindicate him about being a "goofy creepster" ? The very definition of bias...

 

@rsmehta - the avg share towards the end of 2014 was below 19 million and repurchasing let's say $210M worth of shares @ $70/share means 16M shares outstanding.

 

@thefatbaboon - the price increase was only instituted in December...so a strong/weak quarter doesn't give us the full picture of the price increase.

 

I've been skeptical of OUTR since the start as it's nearly impossible to pin point the sum total of the final value of all the businesses. The only thing relatively stable is coinstar, while redbox fluctuates from one Q to the next Q and ecoATM is a big question mark.

 

 

I might write puts with effective strike price around $50...

[thefatbaboon]

Isn't the part i quoted referring to 2015 outlook. 2015!  Not 2014 or 4Q 2014!

 

Please both of you read the press release carefully, incase I'm going insane.

 

I'm not saying anything about weak quarters in 2014 or price increases in 2014 or anything about 2014, I'm just doing the math on flat Ebitda in 2015 and working out what that means given the +25% price increase beginning of december.

 

If I'm not misunderstanding this rather cryptically written outlook then I think it certainly is grounds for firing the CEO.

 

[frommi]

Isn't the part i quoted referring to 2015 outlook. 2015!  Not 2014 or 4Q 2014!

 

Please both of you read the press release carefully, incase I'm going insane.

 

I'm not saying anything about weak quarters in 2014 or price increases in 2014 or anything about 2014, I'm just doing the math on flat Ebitda in 2015 and working out what that means given the +25% price increase beginning of december.

 

If I'm not misunderstanding this rather cryptically written outlook then I think it certainly is grounds for firing the CEO.

 

I wouldn`t read too much into that, could be that they were i a hurry do get this press release out. Why write that they give a guidance at the earnings call when they do it now?

And i don`t think they fired the CEO because Redbox is not performing, its either because there are problems with the profitability of ecoATM and disputes about the big rollout or it was really just a personal thing he did (perhaps at the CES?). The market is now pretty sure that we have a next Blockbuster here, so what do i know perhaps he is right and i am just a fool.

[TwoCitiesCapital]

Yea - I'm playing the "wait and see" game. I'm skeptical that they'd fire the CEO after 1 month of results after the price hike - especially given that 2014 as a whole was a weak slate for blockbusters. I'd be disappointed to see that they project the same earnings going into 2015 for multiple reasons:

 

1) I did believe the price hikes would be a net gain to the bottom line - potentially significantly

2) 2015 is a much stronger year with a lot of exciting titles coming out through the Summer

 

However, let's assume the price hikes ARE totally offset by volume decline AND that volume doesn't receive any boost at all from a stronger movie selection (ice cube is melting faster then initially thought) - it doesn't change the situation much from the prices prior to the price change announcement. We simply have more information on how quickly the ice cub is melting.

 

Income from coinstar should still be able to cover debt service and cash flow from redbox should still be able to be used to repurchase shares. I don't want to speculate on how many they'll purchase or how much gets paid as a dividend; however, it seems like the value at $62 isn't that much different from a few months back when we were buying it. I'll wait until February 5th for the reasoning behind the departure to determine if I want to pick up more here or not. I too suspect problems with the new product roll-outs or unprofessional behavior on the part of the CEO.

[rich379]

The Jan 2017 $30 call options can be had for $34.

Seems like a good deal to me...

 

Rich379

[mateo999]

I know this has been hashed out post the Jan 20th announcement.  But I find it curious at how blasé this board seems to be in digesting the news.  So I pose the question: unless OUTR is expecting a SIGNIFICANT dropoff in rental volumes, how else can one explain the company taking a ~30% mix-adjusted price increase in 2015 (at least from Jan through Nov) at its dominant division yet only see LSD revenue growth and compressed EBITDA margins?

 

Anyone?

 

I loved this stock, but have been killed in the past by thesis drift (in this case, rentals should be fairly inelastic as long as priced comfortably below streaming price umbrella).

[thefatbaboon]

I know this has been hashed out post the Jan 20th announcement.  But I find it curious at how blasé this board seems to be in digesting the news.  So I pose the question: unless OUTR is expecting a SIGNIFICANT dropoff in rental volumes, how else can one explain the company taking a ~30% mix-adjusted price increase in 2015 (at least from Jan through Nov) at its dominant division yet only see LSD revenue growth and compressed EBITDA margins?

 

Anyone?

 

I loved this stock, but have been killed in the past by thesis drift (in this case, rentals should be fairly inelastic as long as priced comfortably below streaming price umbrella).

 

mateo, you'll notice I tried to raise this a couple of times with not much luck.  In my opinion IF on the 5th I hear info confirming that all the price increase is being eaten by volume decline as implied by the Jan 20th update I'll probably sell my shares.  My valuation did NOT suppose >20% volume declines in 2015. 

 

I'm holding (but not adding) until more information is available.

 

[mateo999]

I know this has been hashed out post the Jan 20th announcement.  But I find it curious at how blasé this board seems to be in digesting the news.  So I pose the question: unless OUTR is expecting a SIGNIFICANT dropoff in rental volumes, how else can one explain the company taking a ~30% mix-adjusted price increase in 2015 (at least from Jan through Nov) at its dominant division yet only see LSD revenue growth and compressed EBITDA margins?

 

Anyone?

 

I loved this stock, but have been killed in the past by thesis drift (in this case, rentals should be fairly inelastic as long as priced comfortably below streaming price umbrella).

 

mateo, you'll notice I tried to raise this a couple of times with not much luck.  In my opinion IF on the 5th I hear info confirming that all the price increase is being eaten by volume decline as implied by the Jan 20th update I'll probably sell my shares.  My valuation did NOT suppose >20% volume declines in 2015. 

 

I'm holding (but not adding) until more information is available.

 

My strategy is pretty much identical to yours re: the 5th.  I feel like I should be buying vol on the name via straddle

[yadayada]

well core business did 300m$ in FCF in 2014... 60m$ was eaten up in new ventures. If they get that to break even, 250m$ is probably conservative. so a 20% yield really. I wonder what the new CEO will do with regards to dividend or buyback. If they pump a lot of money in other new ventures I will be selling too.

 

If they get new ventures to break even this year, then your looking at a 25% yield.

 

Im kinda scared that the failed streaming thing together with a really bad december and january because of the price increase is why the CEO left. A combination of the two instead of just the streaming misfire.

 

This is what they said before price increase:

While the company acknowledged the hikes will dampen rental volume, it anticipates that the price increases will “help offset future declines in the physical rental market.”

 

It makes me think they dont want to announce a increase in profit? As that would look bad? They would look like greedy capitalists in the media? Plus if they suprise with really good earnings, the stock will probably bounce really hard triggering all those options? They are trying to spin the whole price increase as something that will be good for the consumer, so announcing a 20% expected rise in profits would look bad then.

[thefatbaboon]

 

 

If one assumes a 20% FCF yield in 2015.  And assume that they cannot raise prices again for another 3 or 4 years.  The underlying decline rate of 20%, if extrapolated, leads to serious problems.  2016: 16%, 2017: 13%, 2018: 10% & cumulate all that with the 20% in 2015 and one gets about a 50% return on investment.  This investment does not make sense unless the cube is melting meaningfully slower than the guidance seems to imply.

[yadayada]

yeah but a price increase shakes out certain consumers, it wont keep declining 20% the next years. And they can always decrease prices again.

 

Then there is also coinstar gift card exchange. Curious how that adds up, given that there are huge amounts of un used gift cards. And i guess with Apple's record Q4, a lot of people used EcoATM.

 

Finally you have to take a 20% decline over Redbox. So that is about 260m$ in 2016, 220m$ in 2017. and ~190m$ in 2018. This assumes about 80m$ for coinstar.

 

In your assumptions, they would bleed 60m$ a year on new ventures for 3 years. Finally if you assume share buybacks, the yield would be much higher. And if you assume they dividend it all out or most of it, you would get close to half the market cap in cash by that time.

[thefatbaboon]

Well a decrease doesnt exactly help the problem!

 

And I think for conservativism it's perfectly reasonable to assume a decline rate into the future at historical "worst".  Surely the tides of change are only going to get worse? 

 

I liked this investment when i thought cube was melting at mid single digits and that 2014 was exacerbated by a terrible slate.  But if it's declining mid to high teens then I think my margin of safety has completely vanished.  And the bet is coming down to a speculation on eco, which i don't care for.

[yadayada]

Yeah but they jacked up prices , so you will see a larger decline in rentals! But the consumer base they will have left after that will still rent from them. And you would not expect a 20% decline to keep going. Especially if the value proposition is still there.

 

And even in your worst case scenario you would get almost half your investment back in 3 years if they paid it all out...

 

Core business would do 300m$ this year (assuming price rise is offset by decline), 260m$ in 2016, 220m$ in 2017 and 190m$ in 2018. That is 970m$! Lets say they waste 250m$ on new ventures. That is now 720m$. They pay off 300m$ in debt, and 420m$ in dividends.

 

Then by the time 2019 stars you hold a business that does let's say 160-170m$ in FCF, with 700m$ of debt. And this assumes new ventures all fail and 250m$ is wasted. Their gift card business doesn't add much, and redbox falls of a cliff. If you subtract dividends, your getting a business doing 160m$ for 760m$ basically ( i pay no taxes on dividends though).

 

Btw, if they pay off debt, that is another 14m$ in interest they are not paying. So maybe including extra tax, about 10m$ on top of that.

 

My biggest fear here is not redbox declining, but some CEO who barely owns any shares pumping half the FCF into speculative new idea's. Allthough institutional shareholders own almost half of the company.

[thefatbaboon]

Yeah but they jacked up prices , so you will see a larger decline in rentals! But the consumer base they will have left after that will still rent from them. And you would not expect a 20% decline to keep going. Especially if the value proposition is still there.

 

And even in your worst case scenario you would get almost half your investment back in 3 years if they paid it all out...

 

Core business would do 300m$ this year (assuming price rise is offset by decline), 260m$ in 2016, 220m$ in 2017 and 190m$ in 2018. That is 970m$! Lets say they waste 250m$ on new ventures. That is now 720m$. They pay off 300m$ in debt, and 420m$ in dividends.

 

Then by the time 2019 stars you hold a business that does let's say 160-170m$ in FCF, with 700m$ of debt. And this assumes new ventures all fail and 250m$ is wasted. Their gift card business doesn't add much, and redbox falls of a cliff. If you subtract dividends, your getting a business doing 160m$ for 760m$ basically ( i pay no taxes on dividends though).

 

I believe you make a mistake in thinking of this as a going concern when looking out from 2019.  This is an investment where one needs payback, you need to see a fairly easy cash on cash double within 4 or 5 years.  And then the afterlife is free.

 

Working with your numbers we pay 1.2bn today for equity and by 2019 we have collected 700m.  What's you residual worth?  How comfortable are you ascribing a $1bn equity value in 2019 (i'm not).  But let's say you are.  Your $1.2bn investment has bought you $1.7bn over 4 years.  That's a sub 10% cagr.  Not good enough for this kind of investment.

 

 

[frommi]

I have no clue if my valuation makes sense, but my sum of the parts valuation with Redbox FCF declining by 20% per year, Coinstar growing by 3% and ecoATM worth what they paid for still gives me a fair value of around 64$ per share without any price increase.

 

My numbers:

Coinstar FCF ~80 million, fair multiple around 12 (8.5+3) = 960

ecoATM = 400

Redbox FCF = 222.95,178.36,142.688,114.1504,91.32032 = 750

 

Net Debt = 916 million

Fair Marketcap=1194

Shares outstanding from guidance for Q4 2014 = 18.5 million

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

 

With the price increase increasing Redbox FCF by 100 million $ in 2015 and Redbox declining only by 10% per year its worth around 100$ per share.

 

I must admit that i was probably a bit too optimistic in all my last postings, but i still see enough value here to stay invested. I thought about what i can get from the next quarterly result and came to the conclusion that the most interesting part will be new ventures. Redbox revenue in Q4-2014 is probably around 450$ million (overall:600-cstr:85-eco:65?), ~10% lower than in Q4-2013, so nothing special. The really important number comes with Q1-2015, then we will see the full effect of the price increase. (Btw. i think that the amazon prime special one month trial and "The Interview" had a negative impact on Q4-2014).