CSTR - Coinstar

[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).

 

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.

I think there are two reasons  why this still would be a good investment. That assumption is basicly a really bearish scenario. It assumes they waste a ton of money on new ventures with zero payback, and redbox will very quickly decline. And it assumes that there is zero upside in price increase.

 

And second you are forgetting that coinstar did like 80m$ in 2014 and is growing, and has a rock solid moat. They have their gift card kiosks which were only partially rolled out in 2014. So it is very likely this business will grow at least 20% in the next 4 years (not CAGR, just 20% total). So then you will have a very solid business in 2019 that probably deserves a 15x multiple. And without upside in equity price you get any cash flows from redbox for free then.

 

So then you will do 10% in a worst case scenario, and like 60-70% CAGR in best case. Which seems like a good deal to me.

Edit: and there is a catalyst. You will know which scenario will happen within 2 years or so. If new ventures adds like 50m$ in income, redbox is still about the same, and coinstar is growing, this business is at least worth 2.5 billion$. If you add in some buybacks in the meantime, upside is huge. If they just pay dividends, you have a stock price that is 2x as today, and dividends of about 4-500m$ in the mean time.

 

If they shrink quicker then expected, you will probably see a dividend, and small upside from here, and you can sell without a loss.

[100 Shares]

I don't think this has been discussed yet but EcoAtm is starting the look like it has potential. When I first bought into OUTR I had a pessimistic view of EcoAtm and thought that $300 million was an outrageous price for something they still had to invest a lot of growth capex into would loose money for a few quarters bringing the acquisition cost to much higher than just the $300 million. I still have a lot of those doubts about the purchase price and that one won't be answered until after a few years of operating results but going forward they have a lot of sunk costs and EcoAtm was Just about break even on Ebitda is the third quarter. They have many fixed costs and gain leverage with scale. My expectations is it becomes profitable very soon or they will have dsisapointed even my rather low expectations.

 

I started this with I don't think this has been mentioned yet, and then went on a little rant but the part not mentioned is EcoAtm was practically break even on Ebitda. Ebit was reported as -$4.43M and depreciation and amortization was $4.37. That's only a $60,000 loss in Q3. Still a long way to go but it is shifting from a money pit a little bit each quarter.

[kab60]

No position here, but I really don't get how ecoATM should work. First of all, I'd expect daily volumes to be pretty low, because it accepts only pricey items. Then, the units actually have to be resold, and whereas Redbox pretty much runs "by itself" I'd expect alot more OPEX connected to ecoATM since humans are involved. Do we have any volume numbers for ecoATM? Also, while a kiosk doesn't have any issues in handing out a DVD and receiving cash in return, I don't really understand how an ecoATM should be able to determine a fair price for a smartphone. If the machine "is conservative" and pays a relatively small price for each unit, I don't understand who'd use it when the stuff can easily be resold online. I know about the American urge for instant gratification but still; I don't really see how you can get a big volume with the business model and at the same time I figure there's a lot more human manpower needed (opex). I haven't really seen alot of numbers for ecoATM, but I'd love to be proven wrong. Just haven't been able to feel comfortable with the model (and that doesn't exactly make me excited about managements' judgements). Fire away!

[Travis Wiedower]

I've stated my doubts about ecoATM in this thread as well. I understand people wanting instant cash and a lot of lower income/older people not being as comfortable selling stuff online, but the price difference between ecoATM and other avenues is massive. I visited an ecoATM (as I posted a page or two ago) and the price differences were astounding compared to what you can get on eBay. I also think the economics are a little far fetched.

 

Management said their goal is $100k revenue/kiosk. Assuming the average electronic item they purchase is $100 (doubt it's that high) that's 1,000 units per year or 2.74/day. Maybe I'm crazy but that seems like a lot. I walk past ecoATMs on a regular basis and have never seen one person using them. And I've paid attention every single time since I got interested in this company last summer.

 

With all that being said, last update we had management stated ecoATM was moving along as expected and revenue/kiosk was around $65k so I'm obviously wrong thus far. And I hope I continue to be wrong because I don't give any value to this part of the business in my valuations.

[Travis Wiedower]

Oh, and to answer one of your concerns, if I remember correctly they have deals with overseas buyers so a phone that ecoATM buys is essentially already sold. So not much work involved there. And ecoATMs are in the same locations as Redbox (often they're sitting next to each other) so I'm sure the same person who handles Redbox stock does ecoATM as well--very little additional manpower needed.

[pantheman]

No position here, but I really don't get how ecoATM should work. First of all, I'd expect daily volumes to be pretty low, because it accepts only pricey items. Then, the units actually have to be resold, and whereas Redbox pretty much runs "by itself" I'd expect alot more OPEX connected to ecoATM since humans are involved. Do we have any volume numbers for ecoATM? Also, while a kiosk doesn't have any issues in handing out a DVD and receiving cash in return, I don't really understand how an ecoATM should be able to determine a fair price for a smartphone. If the machine "is conservative" and pays a relatively small price for each unit, I don't understand who'd use it when the stuff can easily be resold online. I know about the American urge for instant gratification but still; I don't really see how you can get a big volume with the business model and at the same time I figure there's a lot more human manpower needed (opex). I haven't really seen alot of numbers for ecoATM, but I'd love to be proven wrong. Just haven't been able to feel comfortable with the model (and that doesn't exactly make me excited about managements' judgements). Fire away!

 

The way I understand it, the prices quoted to the seller of a device are live quotes from buyers. They've disclosed in filings that the devices are pre-sold at the time of collection so I'd imagine there's a backend software that updates daily, hourly, whatever, with prices that buyers are willing to pay. The ecoATM margin is then tacked on and the quote is spit out to the seller at the kiosk.

 

http://www.sec.gov/Archives/edgar/data/941604/000119312513302747/d573550dex992.htm

 

 

[yadayada]

I think the consumer is paying for convenience. You dont have to send it in, and deal with all the headaches, you get cash now. So they target a certain population group with this. And I think they already did almost 90k$ per kiosk in last quarter. But let's see how that plays out when they scale up.

 

if they do achieve their goals, that is another 100-150m$ in FCF. I think they bank on the fact that a lot of people just let their old phone rot, even though they can sell it on ebay for 100-200$. So these people consider it as free money as they wouldn't have traded it in anyway.

[pantheman]

Oh, and to answer one of your concerns, if I remember correctly they have deals with overseas buyers so a phone that ecoATM buys is essentially already sold. So not much work involved there. And ecoATMs are in the same locations as Redbox (often they're sitting next to each other) so I'm sure the same person who handles Redbox stock does ecoATM as well--very little additional manpower needed.

 

There is additional manpower for the kiosk at the time of sale, not sure how much or how expensive it is but they verify identities live when someone visits a kiosk. Essentially you put your license in the machine and someone at ecoATM compares your license to a live video or snapshot of you at the kiosk (this is to help law enforcement with stolen devices and to lower their risk of acquiring stolen goods). There's more about this in the Law Enforcement section of the ecoATM website.

[DTEJD1997]

Hey all:

 

I've also wondered about the EcoATM's too.  It seems like an INCREDIBLY foolish boondoggle...I've had MANY years of selling "used" electronics on the interwebs...

 

It is a very, very tricky business.  It can be lucrative, but you've got to work in niche products.  It also requires a lot of touch work.

 

HOWEVER, maybe these ATM's only accept Ipads, Iphones, and the very highest end Android devices.  There is an established market for these things...you could sell as many used Iphones that you could get your hands on, especially if you have an overseas market to sell into.

 

One problem would be accepting items with latent or hard to discover defects.  A small blemish on the screen, a "dead area" on the screen, scratchy speaker, etc.

 

This seems VERY difficult to do right, but I guess it could work if you did it just right....

[krazeenyc]

Hey all:

 

I've also wondered about the EcoATM's too.  It seems like an INCREDIBLY foolish boondoggle...I've had MANY years of selling "used" electronics on the interwebs...

 

It is a very, very tricky business.  It can be lucrative, but you've got to work in niche products.  It also requires a lot of touch work.

 

HOWEVER, maybe these ATM's only accept Ipads, Iphones, and the very highest end Android devices.  There is an established market for these things...you could sell as many used Iphones that you could get your hands on, especially if you have an overseas market to sell into.

 

One problem would be accepting items with latent or hard to discover defects.  A small blemish on the screen, a "dead area" on the screen, scratchy speaker, etc.

 

This seems VERY difficult to do right, but I guess it could work if you did it just right....

 

I'm not convinced RedBox will be stable. And I don't think EcoATM will work mainly b/c I think they are at a structural disadvantage to the AT&T, Sprint, Verizon, Apple, etc. But I dont' think these are as large problems as you think. With high enough volume you can bring repairs in house and it is quite cheap.  And you make a lot better margins, when you have the proper distribution to sell into all the world markets to find the highest sale price for your electronics. Of course, for this to work really well, it requires real scale -- ala Brightstar. 

[Travis Wiedower]

One problem would be accepting items with latent or hard to discover defects.  A small blemish on the screen, a "dead area" on the screen, scratchy speaker, etc.

 

I think that's one of the main reasons they offer less money for these electronics vs other buyers. They know a certain percentage will be damaged so they cover themselves by paying less.

[kab60]

One problem would be accepting items with latent or hard to discover defects.  A small blemish on the screen, a "dead area" on the screen, scratchy speaker, etc.

 

I think that's one of the main reasons they offer less money for these electronics vs other buyers. They know a certain percentage will be damaged so they cover themselves by paying less.

Exactly. Which is why the value proposition for most customers will have to be really bad. Maybe we're handicapped as value investors. :) Lots of great input, thanks.

[Picasso]

One problem would be accepting items with latent or hard to discover defects.  A small blemish on the screen, a "dead area" on the screen, scratchy speaker, etc.

 

I think that's one of the main reasons they offer less money for these electronics vs other buyers. They know a certain percentage will be damaged so they cover themselves by paying less.

 

Wouldn't the value of the service involve a tight "bid-ask spread?"  This seems like the definition of a poor business that only becomes more capital intensive as it scales up, currently lacks any major scale advantages, and does not provide value to the consumer other than immediate gratification? 

 

I have an old iPhone 5 (Verizon 16GB) and just priced it on ecoATM versus Gazelle.  ecoATM gave me a range of $11-$70.  Gazelle gave me $90-120.  Seriously, the high end of the ecoATM offer is the low end of the ecoATM offer.  I would guess that the more time that goes by, the more that spread will widen as the larger resellers can offer better pricing from scale advantages.

 

ecoATM seems pretty lousy to me.

 

edit: I just did a search for one of their kiosks and realized I messed with one before.  She was ordering some food and I was wandering around the food court and started messing with the lonely kiosk in the middle.  I recall laughing with my wife at some of the offers it threw back at us for our new phones.  I had a Blackberry Q10 (less than a year old) that gave me an offer for $3.  Who the hell would take that offer?  My wife's iPhone 5 was offered $40 or so.  There were a lot of phones they offered $1 for.  Not even enough to go rent a Redbox DVD with.

[rsmehta]

One problem would be accepting items with latent or hard to discover defects.  A small blemish on the screen, a "dead area" on the screen, scratchy speaker, etc.

 

I think that's one of the main reasons they offer less money for these electronics vs other buyers. They know a certain percentage will be damaged so they cover themselves by paying less.

 

Wouldn't the value of the service involve a tight "bid-ask spread?"  This seems like the definition of a poor business that only becomes more capital intensive as it scales up, currently lacks any major scale advantages, and does not provide value to the consumer other than immediate gratification? 

 

I have an old iPhone 5 (Verizon 16GB) and just priced it on ecoATM versus Gazelle.  ecoATM gave me a range of $11-$70.  Gazelle gave me $90-120.  Seriously, the high end of the ecoATM offer is the low end of the ecoATM offer.  I would guess that the more time that goes by, the more that spread will widen as the larger resellers can offer better pricing from scale advantages.

 

ecoATM seems pretty lousy to me.

 

edit: I just did a search for one of their kiosks and realized I messed with one before.  She was ordering some food and I was wandering around the food court and started messing with the lonely kiosk in the middle.  I recall laughing with my wife at some of the offers it threw back at us for our new phones.  I had a Blackberry Q10 (less than a year old) that gave me an offer for $3.  Who the hell would take that offer?  My wife's iPhone 5 was offered $40 or so.  There were a lot of phones they offered $1 for.  Not even enough to go rent a Redbox DVD with.

 

    I noticed this also.

 

    Not sure how I feel about it though.

 

    Could be a good thing, could be a bad thing. Perhaps it's priced to maximize Gross Profit???

[yadayada]

Ok so this:

The benefit from the price increases to revenue in December 2014 was greater than the company expected due to the robust content slate and holiday seasonality that attracted customers and lessened the impact of increased prices on rental demand, helping to offset weaker performance from September and October releases and secular decline in the physical rental market.

Is nice. And another 250m$ buy back program, plus a 30c dividend. Which is kinda weird. On the one hand your doing a dividend, but on the other hand they are now buying back stock more expensive because of that.

 

Anyone listening in to the call?

[Travis Wiedower]

Would prefer just buybacks over dividends at these prices but whatever, better than blowing it on new ventures. Happy to see "'our commitment to return 75- to-100 percent of annual free cash flow to stockholders,' said Nora M. Denzel, Outerwall's interim chief executive officer." I'll be listening in today, might have to jump off early though.

[KCLarkin]

And another 250m$ buy back program, plus a 30c dividend. Which is kinda weird. On the one hand your doing a dividend, but on the other hand they are now buying back stock more expensive because of that.

 

They only have 19M shares. They need to do the dividend or there won't be any liquidity.

 

[yadayada]

So it seems they will do 240m$ in 2015 if you assume no benefit from new ventures or price increase. and core business did over 300m$ in 2014 like expected. It seems the difference between capex and depreciation is huge. For example 175m$ is depreciation for redbox and coinstar, yet capex is projected to be about 40-50m$ again. So that is a 125m$ boost that somehow the market does not seem to get. They already stated that a lot of their machines last far beyond depreciation period.

 

I want to know more about their new exchange venture though. It seems that could really add up? And provide a nice stable income. There are a huge amount of unused gift cards lying around.

[gfp]

Looks like they are projecting 1000-1900 fewer Redbox machines for 2015 (net).

 

edit: I see now that this is due to the Canadian exit

[yadayada]

they had a decline in eco atm revenue. If you annualize that, it means only about 55k$ per machine. Or maybe 60k$-65k$ if it is really seasonal. I hope that does not become a big cash burn here.

[TwoCitiesCapital]

Looks like they are projecting 1000-1900 fewer Redbox machines for 2015 (net).

 

Seems like a good start though much of this may be related to closing down Redbox Canada. They had somewhere around 40k prior to 2014. If "same store" sales are negative, and you can see the product as being obsolete in the future, then it make sense to let them roll off as they deteriorate instead of fixing/replacing them with new machines. This will also help with cannibalization of sales that may have occurred with over expansion going into 2014. I'm not worried about them shutting down just 2% of their kiosks and a number of these

 

"The benefit from the price increases to revenue in December 2014 was greater than the company expected due to the robust content slate and holiday seasonality that attracted customers and lessened the impact of increased prices on rental demand, helping to offset weaker performance from September and October releases and secular decline in the physical rental market."

 

Didn't read the whole press release, nor have I  listened to the call yet, but I really liked this statement. December was the first month of the price increase and it had a strong movie slate and they said that the "week of December 29, 2014, marked the highest rental week in Redbox history, led by strong new release titles." That doesn't sound like a demand drop off to me! 2015 will be similar - strong movie slate and higher prices.  FCF rose from 160M to 240M with much of that occurring in the 4th quarter with a slow movie slate and higher prices...so something must not be all bad.

 

Still disappointed that there was no news on the CEOs departure. Though it's appearing less and less likely that it wasn't related to the performance after the price hike. I suspect inappropriate behavior.

[valueyoda]

Those share buybacks will start to look ugly if business continues to slow.

[yadayada]

yeah so they had their best week ever in december, I doubt it's because of that. And they said basically nothing about it. I wonder though , a 25% price increase means 475m$ of extra FCF. Some extra costs for new content with their video game segment, but you would need a 20-25% drop for it to be cancelled out. And that doesn't sound that likely. If there is only a 15% drop, that is still 90m$ of extra FCF? It seems to me they are underpromising and hoping to overdeliver to get a big bounce in the stock price.

 

How ill 2015 not be freaking awesome? Star wars and mission impossible 5?? New bond movie this year... A new Jurassic movie, New mad max. 50 shades of grey. Seems like a pretty promising year to me.

http://www.ibtimes.co.uk/box-office-predictions-2015s-biggest-films-avengers-star-wars-jurassic-world-1480655

 

How is this not super promising. :/ Honestly it sounds like they are really covering their asses and keeping expectations low.

[100 Shares]

And another 250m$ buy back program, plus a 30c dividend. Which is kinda weird. On the one hand your doing a dividend, but on the other hand they are now buying back stock more expensive because of that.

 

They only have 19M shares. They need to do the dividend or there won't be any liquidity.

 

The liquidity argument never made any sense to me. Their daily trading volume is about 3-4% of shares outstanding. You could literally build or exit a  10% position in 2-3 weeks. Liquidity is not a problem. On the other hand this dividend is like 10% of free cash flow, they will still buying back many shares with the majority of the FCF.

 

Maybe this will be discussed in the conference call but they practically halted the buyback in Q4 and haven't really bought any back in January either. Maybe that's a good thing since the stock dropped 20% on a timing aspect but doesn't really make a lot of sense to me. Looking at the balance sheet during Q4 they let their FCF let their cash position build by about $50M and reduced their long term debt by about $50M, certainly some luck in terms of timing.

[TwoCitiesCapital]

yeah so they had their best week ever in december, I doubt it's because of that. And they said basically nothing about it. I wonder though , a 25% price increase means 475m$ of extra FCF. Some extra costs for new content with their video game segment, but you would need a 20-25% drop for it to be cancelled out. And that doesn't sound that likely. If there is only a 15% drop, that is still 90m$ of extra FCF? It seems to me they are underpromising and hoping to overdeliver to get a big bounce in the stock price.

 

How ill 2015 not be freaking awesome? Star wars and mission impossible 5?? New bond movie this year... A new Jurassic movie, New mad max. 50 shades of grey. Seems like a pretty promising year to me.

http://www.ibtimes.co.uk/box-office-predictions-2015s-biggest-films-avengers-star-wars-jurassic-world-1480655

 

How is this not super promising. :/ Honestly it sounds like they are really covering their asses and keeping expectations low.

 

That's kind of how I feel. I'm trying not to get too excited because it's still a company in secular decline, but the little I've seen of these results so far makes me feel much better about the price increases then I did after they announced the resignation of the CEO. It's hard for me to imagine them having their best week every with higher prices and if volume is dropping off hugely because of it...

 

I'm not saying there won't be a decline - I just don't think it'll be more than 10-15% or so...and that is with rates of decline already being 5% as is prior to the price hike really taking effect. Another year or two of 235-250M in FCF could be a huge deal...especially considering that there is enough left on the repurchase authorization to buy back 35-40% of the current shares this year at current prices.