CSTR - Coinstar

[valueyoda]

It seems like a great idea right now to aggressively buy back stocks, but those FCFs will fall of rather sharply, so diverting current free cash flows to increase the stake of non-selling shareholders in a company that will partly go the way of Blockbuster is hardly a good decision in the long run. Special dividends make more sense at this stage.

[TwoCitiesCapital]

I'm beginning to wonder if we aren't being too pessimistic on Outerwall. What company in terminal decline has it's best week ever AFTER raising prices by 25-50%? What evidence has there been for the terminal decline of the company starting now? What I see for 2014 is a company that suffered from a weak release schedule and over expansion - not necessarily the beginning of a perpetual decline. The bottom 3 items would seem to refute the decline narrative:

 

1) There is nothing that currently fills the niche that Outerwall serves

2) Revenues are only down a slight amount to be driving concerns of a mass exodus

3) The company had it's best weak ever AFTER raising prices 25%-50%. December has a slightly stronger release schedule - but that is what the whole year of 2015 will be like.

 

Does any of that really support that narrative of a company beginning it's terminal decline? I have no doubt that there will be decline, but I'm beginning to question if we're aren't joining the market in being too pessimistic. What current evidence points to the reasonable conclusion that redbox will disappear in the next 3-5 years? What if decline doesn't even begin for another 3-4 years?

[valueyoda]

True, in the near term they're pretty much the only game in town, so their cash flow profile looks pretty good. I do think that Mr. Market is looking 2-3 years on this one. DVD sales and rentals will continue to decline and probably accelerate. Therefore, at a certain point within that 2-3 year window, gaining market share in a declining market, won't cut it anymore and cash flows will dry up. This company applies a similar strategy to Gamestop. Once you are involved with a business whose end market will sooner or later decline sharply, share buybacks work counterproductive, since the share buybacks amplify non-selling shareholders' exposure to the declining business.

 

The balance sheet will cause a problem as well, as the net debt sure is fully predicated on the notion that Outerwall can sustain these cash flows. It would therefore be better for Outerwall to repay debt than to buy back shares.

[frommi]

The numbers are great! Pretty easy to see that they kicked the CEO because of ecoATM. Redbox is not declining (SSS only -1.3%) and the price increase has fully worked in the last month of december! Now just get rid of New Ventures completly and everythings fine. Thinking about buying more calls tomorrow.

[valueyoda]

Agreed. The stock will probably go up in the near term on good numbers. Hard to see this stock trade above $20 in a few years though.

[frommi]

True, in the near term they're pretty much the only game in town, so their cash flow profile looks pretty good. I do think that Mr. Market is looking 2-3 years on this one. DVD sales and rentals will continue to decline and probably accelerate. Therefore, at a certain point within that 2-3 year window, gaining market share in a declining market, won't cut it anymore and cash flows will dry up. This company applies a similar strategy to Gamestop. Once you are involved with a business whose end market will sooner or later decline sharply, share buybacks work counterproductive, since the share buybacks amplify non-selling shareholders' exposure to the declining business.

 

The balance sheet will cause a problem as well, as the net debt sure is fully predicated on the notion that Outerwall can sustain these cash flows. It would therefore be better for Outerwall to repay debt than to buy back shares.

 

Really? They can pay back debt with Coinstar somewhere in the future, there is no need for it now. Buying back stock gives them a >10-15% return on their money at current prices, thats for sure the better use of free cash. I really don`t care about the balance sheet as long as the cash flows are stable and the company has a moat. And it not only has a moat but 2 monopolies!

DVD sales may be declining but when you look at the Redbox numbers they are not! 2014 was just a very weak box office release year.

[Picasso]

I am sort of surprised by the level of bullish sentiment by the longs on this board.  The biggest issue I have is the enterprise value of the stock. 

 

You have a billion dollars of debt in front of your equity position that currently yields around 6-7%.  Let's say we take this thing private at $80.  It's going to cost us over $2.5 billion and what do we get?  $500 million of EBITDA on a melting ice cube?  Redbox is going to whittle down to nothing in several years and you might be left with $100-150 million of EBITDA on your $2.5 billion cost for a 4-5% yield on a scrappy, snack machine business. 

 

Let's say you give this a 6x multiple on what's left over and you're looking at *tops* $900 million of value left.  That basically implies the tranche of value that is your equity position is worthless and the debt is barely covered. 

 

This excludes the weak ecoATM business that seems likely to produce very little returns.  I mean look at this response on the conference call:

 

Eric C. Wold - B. Riley Caris, Research DivisionOkay. And then just last question, kind of a longer term one. How should we think about long-term outlook for Outerwall, maybe 5 -- 3 to 5 years down the road? If Redbox continues to experience kind of flattish results or even secular impacts and decline, ecoATM as it is or possibly a little bit worse, do we need to start looking outside the company again for new growth vehicles? Or does it kind of just become a kind of harvesting and share count elimination story?

Galen C. Smith - Chief Financial OfficerSo we've got 2 core businesses that we think have very great prospects. We expect them to continue to drive great free cash flow -- strong free cash flow in the next couple of years. As I mentioned as well, eco is growing at an amazing pace. And so -- when you've got 70- to 90-plus percent growth rates, it's very, very strong. So it's a very important part. As we think about overall, again, how we allocate capital, we're allocating capital both internally around what are those things that we think generate the greatest shareholder value. And we'll continue to do that on a go-forward basis. So again, we'll continue to drive value, drive profitability while still looking forward to what are those things that we can make investments in to drive the long-term value of the company.

 

So their response is we have this butt kicking ecoATM business which is growing revenues but losing money.  And their excuse is the launch of the iPhone which made it difficult to show their value.  Isn't that the best time to show their value?  Isn't a customer most likely to get cash for their old phone when they are trading in for a new one?  Instead their answer to the value proposition is the ability to give cash upfront.  I don't see the optimism.

 

And the other part of the response is, well if we buy up enough stock and sucker in some dividend investors then that takes care of this melting ice cube situation. 

 

It seems obvious to me that shareholders should want 1) debt repayment to keep this a going concern in a worst case (and high probability) scenario, and 2) reinvestment in other melting ice cube businesses.  If you can get those high ROIC's going after enough melting ice cubes, then keep doing them. 

 

For example, lets say we are talking about a company like VRX.  Let's say they have a massive cliff coming up on most of their earnings from certain drugs, but their answer is to just buyback all their shares.  Investors were shorting the stock even though they were still acquiring certain non-durable (debatable) businesses.  Here you have a non-durable business doing nothing but taking all it's free cash flow and buying back stock.  That's a recipe for disaster.

 

And for those who say there is still Coinstar, Coinstar would barely cover interest payments on the current debt in what I would assume would result in a higher cost to capital.  Those 6.5% bonds they have now won't be yielding 6.5% in the future when it's down to Coinstar cash flow to support it.

 

Don't even get me started on the way management is picking and choosing metrics that look good to highlight the quality of the business.  This stock is the definition of a short.  And for those that think this is a no-brainer, you don't have options with 60-80% implied volatility because it's a no-brainer.  This is pretty close to a binary situation and the debt makes the discounted value of the equity almost worthless in a reasonable market participants model.  Optmistically I think this is worth $40 to discount the risks and compensate you for the operational Redbox risks.  Buying at this price only exposes you to the risk and leaves little room for success in the new ventures business.

[frommi]

Its pretty simple. Compare it with IBM, thats a company already in heavy decline since 4-5 years and trades at an FCF/EV yield of 7% that has heavy competetion in every field its in. Now OUTR has an 15% FCF/EV yield and has not even started to decline and has monopolies on the things it does. And no competitor will enter this field In the future. But i agree that ecoATM is trash and hope the new CEO will see it the same way.

[Picasso]

You can't compare this in valuation to IBM.  IBM will always have some massive amount of free cash flow greater than $10 billion regardless of the business headwinds on a $180 billion EV.  IBM has been around for 100+ years and does not avoid buying new businesses to instead focus 100% of FCF on repurchases and dividends because they know they have to find those new businesses to create any shareholder value.  What valuation would IBM be at if they didn't make any acquisitions or dispose of assets over the past several years?  That's what makes this such a dangerous stock.

 

This is a stock with very dubious upside potential and no margin of safety if you run down the value on Redbox as any value investor should do.  For those who are long the stock, I don't know how you view this as anything other than speculation.  I hope it's sized that way.

[DTEJD1997]

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???

 

Hey all:

 

There are margins, wide margins & silly margins...

 

Who in their right mind is going to sell an Iphone for $10 or $20?  WTF???  The only way this would make sense is if the phone is damaged/latent defect or STOLEN.  Maybe somebody who doesn't speak English?

 

Who is making these deals?  How many of these deals is the company getting?

 

That does not appear to be a viable business model.  You could sell on Ebay & get many multiples of that, you could list on Craigslist, take it to a pawnshop OR take it to a phone place and get quite a bit more than $10 or $20 for an Iphone.

 

Bad business model if you ask me...

[frommi]

Ok, than compare it to telecoms. Why is fair value for a telecom at 5.5-6 EV/EBITDA and for OUTR with lower leverage 3.3?

I would make the case that you don't know if 10 years from now both are still making a profit.

[thefatbaboon]

The numbers are great! Pretty easy to see that they kicked the CEO because of ecoATM. Redbox is not declining (SSS only -1.3%) and the price increase has fully worked in the last month of december! Now just get rid of New Ventures completly and everythings fine. Thinking about buying more calls tomorrow.

 

Some thoughts:

 

 

1. SSS may be +1.3%, but that takes into account the substantial price increase.  Looking simply at volume: 181m rentals is a decline of 11m rentals from 4Q13 and in the more recent quarter there was $3.5bn of box-office compared to $2.9bn in the same quarter last year.  In other words a 6% vol decline in a period with 20% more box office draw.  Another comparison might be with 1Q14, the only other time in recent years box office has been close to as strong as 4Q14, in that Q there were 200m rentals during a $3.6bn box-office.

 

2.  That said, I don't see any particular additional decline in 4Q compared to 2Q14 and 3Q14.  There was a material worsening from 1Q14 to 2Q14, but it does seem to have stabilized and with the better slate they are driving better volumes. 

 

Rentals per kiosk (units) 1Q10 thru 1Q12 around 5,000;

2Q12 thru 1Q14 around 4,500;

and since 2Q14 we're trending around 4,000.

 

3.  Coinstar's relied on last years price increase to get SSS and rev growth this year. The business continues to have transaction volume that is persistently weak declining between -3% and -5%.  This is only marginally offset by transaction size increases of +1% - +1.5%.  The 10% pricing every 3 years or so is just about enough to keep total revenues flat to marginally positive.

 

4.  I don't find eco compelling.  It's not convenient enough with all that fingerprinting and ID checking.  If it was more like a pawn shop and people could take stolen and found phones it would be better.  As is, if one has to be subjected to the third degree, why not just participate in wireless promotions or hunt for deals online.  I think it was very stupid to be in such a hurry to buy this out of the partnership at such a steep price.  Why didn't they just wait a bit to see it prove itself?

 

5.  I do find the general idea of a specialized kiosk business compelling.  Cheap, flexible, small, automated, impulse positioning...don't ask me in what areas, but I feel there is a long life ahead for kiosks.  This is just a vague thought though!

 

6.  I'm going to continue to hold.  I want to see Q1 and probably the rest of the year.  There is a weak $2.5bn slate (compared to $3.6bn last year).  I'll be interested to see if we hold around the 4,000 rentals per kiosk.

 

7.  I think the shorthand that the income off Coinstar is sufficient to the total debt interest & the net cash suck of new ventures continues to hold.  And moreover, the value of Coin and Ventures added together is approximately equal to the debt principal.  As such I find an easy way of looking at and valuing the shareholder's equity is simply to look at the estimated value of Redbox.

 

8.  I find no evidence from 4Q14 to think Redbox has changed from the ~5% per annum volume decline rate I had previously estimated.  I assume that their 2015 guidance is wrong (too conservative) - or that total 2015 box-office is very very weak.  Redbox worth towards $2bn if the decline stays at 5% for some years.  Worth around $1.2b if the volume decline speeds up to around 10% (obviously not a long way past!).

 

 

[thefatbaboon]

And I wish some clever sleuth would put us all out of our misery and find out why di Valerio was fired.  Surely it can't be that hard to loiter round their office?  Anyone in Seattle?

[yadayada]

I think saying this business is worth 40$ is a bit ridicilous. In a worst case scenario where redbox FCF starts declining like 15% a year and then speeds up to 20 and then 25% over the next 10 years, I still get about 1 bn$ of FCF out of it. And that would be really breaking the trend of the past 5 years. Say coinstar is worth a billion $. that is 2bn$, remove the debt and you have your downside scenario. You have a rapidly declining rental business, and a coinstar monopoly business growing 1-2% a year 5 years from now with about 3-500m$ of debt. Given that about 800m$ will be generated from redbox, adn about 350-400m$ from coinstar in this worst case within 5 years, most of the debt should be paid off by then. That is 1.1bn$ in the next 5 years. subtract buybacks of 250m$, wasted money on new ventures of 250m$, and it is hard to see how debt will be more then 500m$ by then.

 

And I suspect that if this year has only 240m$ of FCF, they will not buyback as much stock. Management is really thinking they can do 3-400m$ in FCF this year.

 

At this point Im gambling that the price increase is a success, and redbox will do just fine this year. And that new ventures will throw off some cash. So you have a downside case of about 50-60$, and possible upside that will be realized very soon of 100-150%.

 

As for weaker 2014, rentals were down 7%, but box office was down almost 6% yoy. So this business seems to be trailing box office. And there is quite a bit of variance in box office. Sometimse you have weaker years, and sometimes better years. Also part of that weakness in per machine rentals since 2012 is because of double placement of machines in some places and because of price hikes.

 

For example from 2012 to 2013, box office was up. And you had an increase in rental per machine. And increase in revenue per machine. And in 2014 they had their best week ever due to strong Q4 releases... So those things are clearly related.

 

I suspect that if they get new ventures to break even this year, and redbox is flat in FCF, they buyback 200m$ of shares, you get equity of about 70$ a year from now. That is equity of 1.1bn$. Given that stock is owned by a lot of institutions, you will probably see a dividend after that.

 

But if the price increase is a sucess, and new ventures isn't a total disaster, then FCF could be 350-400m$ this year, and I think you will see the market put a 6-7x multiple on that, and the stock will probably double. 6x 350m$ divided by 16m shares is 131$ per share. Im happy i got some options at close to 50$!

 

what im scared of is that lady on the call becoming CEO. She barely owns any stock and she has institutional imperative written all over it. Im also not happy how they roll out their ecoatm. If the business has a fixed break even cost, why not roll it out in one year if your confident about it? Now they are losing money unnecessairily. And im not happy about that big decline in Q4. Like someone said, it shoudl be up with new iphone release, not down? At the very least Q1 should be good then. Because when else are people dumping their old phone? It is either before or after the new release of a phone. If you annualize Q3, it would mean about 80k$ per machine. If they scaled that up, that would be break even? Given that they said 100k$ per machine and 25% ebitda margins. that would mean 75k$ is threshold for breaking even? So I dont see how they will make this a success. Given that revenue decline to about 55-60k$ per machine in Q4.

 

 

[valueyoda]

That would assume a steady decrease in FCF and a steady debt repayment schedule. History tells us that once the core business is in reverse, the drop-off can be steep quite quickly.

[yadayada]

where will people get their new releases then for cheap? there will be 4k bluray soon. a 4k movie would make people reach their monthly datacap within a day or 2. So instead of getting more expensive internet and paying 10-20$ a month more, you can just rent them for 2$... 25% of the US does not have broadband. And then a large % of broadband users have slow broadband.

 

You could even see their rental business growing if this happens. People will not be able to watch 4k movies on their 4k tv's through the current internet infrastructure.

 

And they can get around studio's by buying on the open market. So if you take all the bear and bull scenario's, i think the stock should be priced higher then today. And we will find out how much higher within a year or 2.

 

http://www.pocket-lint.com/news/130789-4k-blu-ray-will-be-available-in-time-for-christmas-2015

 

Also unlike blockbuster, redbox can lose over half its revenue and still be able to make a profit. They can scale down very easily.

[frommi]

Regarding decline rates i think the best metric to look at is unique credit cards renting in quarter because this number is not distorted by the release schedule und should give a good look at the user base that is using Redbox.

 

These are the numbers:

 

2013

Q1 40.7

Q2 40.6

Q3 42

Q4 40.3

 

Avg=40.9

 

2014

Q1 41.8

Q2 38.5

Q3 38.7

Q4 39.1

 

Avg=39.525

 

-3.3%

 

So while even the bulls in this thread are calculating with -5% decline rates and the market currently implies 10-15% decline rates, the reality is -3.3% for 2013->2014 with slightly growing! numbers since Q2. And this small decline is currently mitigated by growth in bluray rentals that have higher margins. Thats the reason i wrote that redbox is not declining at the moment.

[mateo999]

Most on the board look at volume declines as # of rentals.  So they see 5.5% rental decline per avg. kiosk in Q4 and move on.  The company doesn't disclose this, but avg. holding period per rental is the X factor.  By my calculus, I peg holding period declines of around -7% for the Q.  Thus I think most decline rates on this board look too low (i.e. not punitive enough).

[frommi]

Most on the board look at volume declines as # of rentals.  So they see 5.5% rental decline per avg. kiosk in Q4 and move on.  The company doesn't disclose this, but avg. holding period per rental is the X factor.  By my calculus, I peg holding period declines of around -7% for the Q.  Thus I think most decline rates on this board look too low (i.e. not punitive enough).

 

But in all these volume or transaction numbers you have the influence of the weak release schedule in 2014 and thus these declines percentages are too high.

[mateo999]

But in all these volume or transaction numbers you have the influence of the weak release schedule in 2014 and thus these declines percentages are too high.

 

Not sure what you're saying here, but mgmt thinks 2015 is going to be a weak slate as well as per the 8-K filed last night:

 

In 2015, there are several factors influencing Redbox revenue that we expect will help partially offset the secular decline in the physical rental market and the underlying risk in the content slate, including the recently implemented price increase, continued product mix shift to Blu-ray and games, and benefits resulting from investments in customer experience and marketing programs. We also expect that revenue will be impacted by a lower box office for titles releasing at Redbox in 2015 compared with 2014.

 

[...]

 

Our 2015 guidance is based on our expectation that the box office of titles releasing at Redbox in 2015 will decrease from 2014 with fewer titles driven by the 16% decline in theatrical box office in the second half of 2014 compared with 2013. Q1 2015 box office for Redbox releases is expected to be 31% below Q1 2014 with eight fewer theatrical titles releasing during the quarter, offsetting the benefit of the price increase. We expect content strength to improve in Q2 2015 as the 2014 slate was particularly weak, bringing the first half of 2015 box office down low double-digits compared with 2014.

 

While it is hard to predict how theatrical releases will perform and studio slates will evolve throughout the course of the year, our assumptions include a box office estimate for the second half of 2015 that is flat to slightly down compared with 2014. Consistent with historical patterns, we expect stronger seasonality in the first and fourth quarters of 2015.

[Picasso]

Most on the board look at volume declines as # of rentals.  So they see 5.5% rental decline per avg. kiosk in Q4 and move on.  The company doesn't disclose this, but avg. holding period per rental is the X factor.  By my calculus, I peg holding period declines of around -7% for the Q.  Thus I think most decline rates on this board look too low (i.e. not punitive enough).

 

Exactly, in addition management mentioned on the conference call that the average holding period dropped as a result of the price increase.

[thefatbaboon]

 

As for weaker 2014, rentals were down 7%, but box office was down almost 6% yoy. So this business seems to be trailing box office. And there is quite a bit of variance in box office. Sometimse you have weaker years, and sometimes better years. Also part of that weakness in per machine rentals since 2012 is because of double placement of machines in some places and because of price hikes.

 

 

Why do you say box office was down? 

 

2013 BO Rentals

Q1  2.8  198

Q2  2.2  187

Q3  2.3  199

Q4  2.9  192

FY  10.2  776

 

2014 BO  Rentals

Q1  3.4  200

Q2  1.3  169

Q3  2.5  172

Q4  3.5  181

FY  10.7  722

 

Q4 BO was UP 20%.  Q4 Rentals down 5.7%.

FY BO was up 5%.  FY Rentals down 7%

 

 

[yadayada]

Box office was down 5.2%

http://www.boxofficemojo.com/yearly/

 

And most of the good ones are only released on DVD in 2015.

 

I think looking at titles, 2015 could be the best box office year yet. About every huge franchise will have a sequel packed into 1 year. But a lot of the big ones will only come on dvd in 2016. So maybe that is why they expect a weak 2015?

-new star wars

-new bond movie

-new del toro movie

-new jurassic movie

-new terminator movie

-new ridley scott movie (hopefully this one doesn't suck)

-new hunger game movie

-2 new disney movies and 1 pixar movie

-new furious movie

-new mission impossible

-a new quentin tarantino movie

-A NEW MAD MAX MOVIE

-A new avengers movie

-50 shades of rape movie

 

How is it going ot be weaker then 2014?

 

if you lay 2014 and 2015 next to each other and had to lay odds without knowing either result, you would need much better odds to bet on 2014.

[thefatbaboon]

Most on the board look at volume declines as # of rentals.  So they see 5.5% rental decline per avg. kiosk in Q4 and move on.  The company doesn't disclose this, but avg. holding period per rental is the X factor.  By my calculus, I peg holding period declines of around -7% for the Q.  Thus I think most decline rates on this board look too low (i.e. not punitive enough).

 

Exactly, in addition management mentioned on the conference call that the average holding period dropped as a result of the price increase.

 

I don't see the variance between looking at rental volume & the holding period as a particular problem.  We also have a number of upgrading elements that aren't take into account in unit volume calculations like Bluray.

 

The Redbox revenue decline last year of 4.1% has done better than rental volume down 5.7%.  1/12 of the year had the benefit of a 20% price increase: say a lift of 1.7%.  So without the price increase in december revenue decline would have been pretty much identical to rental volume decline.  Whatever issues you're seeing with days was offset by other factors (blu ray, discount mgmt...).

[thefatbaboon]

Box office was down 5.2%

http://www.boxofficemojo.com/yearly/

 

And most of the good ones are only released on DVD in 2015.

 

I think looking at titles, 2015 could be the best box office year yet. About every huge franchise will have a sequel packed into 1 year. But a lot of the big ones will only come on dvd in 2016. So maybe that is why they expect a weak 2015?

-new star wars

-new bond movie

-new del toro movie

-new jurassic movie

-new terminator movie

-new ridley scott movie (hopefully this one doesn't suck)

-new hunger game movie

-2 new disney movies and 1 pixar movie

-new furious movie

-new mission impossible

-a new quentin tarantino movie

-A NEW MAD MAX MOVIE

-A new avengers movie

-50 shades of rape movie

 

How is it going ot be weaker then 2014?

 

if you lay 2014 and 2015 next to each other and had to lay odds without knowing either result, you would need much better odds to bet on 2014.

 

You should be adjusting/shifting your BO.  What do you care for the actual BO?  The relevant matter is the historical BO of what is in the kiosk.