CSTR - Coinstar

[Green King]

 

Selling a put is the same as buying a call. This is not neutral.

What do you mean? By "positive carry," Sorry, I meant a surplus. It is NOT a neutral strategy. The synthetic call is meant to be a better alternative than simply going long the stock.

 

100 shares would cost you $7056

Instead you just Buy 1 x $70 Jan2015 Call for $880 and (more than) offset this cost from the $1120 you receive by writing a put Jan $70 PUT. In effect, you are paying $67.6/share when the market price is above $70/share. Please let me know if I erred.

 

you are not reducing the purchase price in this but doubling your exposure.

[yadayada]

 

Selling a put is the same as buying a call. This is not neutral.

What do you mean? By "positive carry," Sorry, I meant a surplus. It is NOT a neutral strategy. The synthetic call is meant to be a better alternative than simply going long the stock.

 

100 shares would cost you $7056

Instead you just Buy 1 x $70 Jan2015 Call for $880 and (more than) offset this cost from the $1120 you receive by writing a put Jan $70 PUT. In effect, you are paying $67.6/share when the market price is above $70/share. Please let me know if I erred.

 

you are not reducing the purchase price in this but doubling your exposure.

Can you specify what we are missing here then? You  lose, you have a net gain from writing the put - the cost of exercising. Which seems to be less then outright buying. Given that we write the same amount of puts and buy the same amount of calls as we buy stock?

 

ALso what about just buying some xtra calls? With the large float exposure, adn given how cheap this stock is, why not load up on some more jan 15 calls?

 

It just seems assymetrical risk return here. The odds are pretty good that they generate 250-300 million and buy back more shares right? It will then trade at a yield of like 25%+. A decent chance that wall street will recognize they arent going anywhere. So it looks to me that this thing will either move big because of the short cover or stay at roughly the same price or go down a bit if it stays unrecognized.

 

So if you buy the stock here, why not buy the jan 16 options? You get almost 2 years to see this work out. And it seems that either after 2 years, this thing is at a FCF yield of at least 8-9, or we are proven wrong, and you had to sell the stock anyway. And the 70$ strike is 11.35$.

 

Then there is the extra option here of their old electronics kiosks. That builds in additional safety as well. odds of succeeding look pretty good there. That is another 700million$ or so built into the downside there.

 

So either this thing shoots up to l ike a 100$ or more inthe next 2 years, or it keeps floating at roughly the same price. With the buy backs the price has to go up right?

 

But even in the base (or bear) case if they only  generate 200 million in FCF more then a year from now, with a 7.5x multiple, that is 1.6 bn$ market cap. If they buy back another 150 million$, that is another 2 million shares. So 1.6bn$/18 million = share price of 88$. So if the market gets rational in the next 2 years, then you should make a gain with a '16 calls as well? Youd make a 50% profit.

 

But if the market decides that with about 17 million shares a multiple of 9 is more reasonable with like 290 million$ in FCF then  I get a share price of 150$. Is that right? that would be a 700% gain? Havent had my coffee yet, so my math might be wrong here.

 

Pls let me know if there are any faults in my logic here. I supose I should factor in debt somewhere here?

[siddharth18]

you are not reducing the purchase price in this but doubling your exposure.

 

You are only exposed to 100 shares regardless of the way OUTR goes - up or down or nowhere. If it goes down, you are forced to own 100 shares from the put you wrote and the call expires worthless. Your cost of owning the shares is partially offset from the call premium you received from writing the put.

 

If it goes up, you experience gain from the call, and the put expires worthless for the buyer (and the put premium is for you to keep).

 

If the stock goes nowhere, your call expires worthless, the put expires worthless and all you gain is the put premium.

 

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The only reason for concocting this strategy (rather than simply going long the stock) is to profit from the fact stocks with high short interest have puts that are more expensive to relative calls

[yadayada]

why not do the same thing with '15 90$ calls and puts. Difference there is bigger. And more volume.

[Green King]

you are not reducing the purchase price in this but doubling your exposure.

 

You are only exposed to 100 shares regardless of the way OUTR goes - up or down or nowhere. If it goes down, you are forced to own 100 shares from the put you wrote and the call expires worthless. Your cost of owning the shares is partially offset from the call premium you received from writing the put.

 

If it goes up, you experience gain from the call, and the put expires worthless for the buyer (and the put premium is for you to keep).

 

If the stock goes nowhere, your call expires worthless, the put expires worthless and all you gain is the put premium.

 

-------

 

The only reason for concocting this strategy (rather than simply going long the stock) is to profit from the fact stocks with high short interest have puts that are more expensive to relative calls

 

Thanks . I was wrong about this one. I have no view on the future of this company. good luck to all.

 

[siddharth18]

why not do the same thing with '15 90$ calls and puts. Difference there is bigger. And more volume.

 

For one, the call value won't increase in lockstep (meaning dollar for dollar) UNTIL the price goes past $90. If OUTR only goes to $85 at Jan 2015, then your calls are worthless if they have a $90 strike.

 

Of course, if OUTR runs past $90, then the % gain would be bigger but we don't know if/when OUTR will go above $90.

[yadayada]

well the volume is pretty bad now with your suggestion. It shows 0 for the 70$ puts.

 

If the price would go to like 80$, then you gain 2460$-320 = 2140$ -100$ = 2040$ gain. If it goes from 71 to 80$ for 100 shares you gain only 900$.

 

If you do it with the 120$ calls you gain  from the difference in puts and calls plus 1000$ from the call options. so 1120$. So I see the best gain here with the 90$ call and puts?

 

With your option you only get slightly less at 90$. You get 120$ from the difference + 2000$ from the exercise. so 2120$ vs 2140$ if you went for the 90$ calls.

 

It is confusing tho, and not intuitive at all.

[siddharth18]

What do you mean volume is bad? If you're looking to establish a position, all you need is a buyer (of your puts) and seller (of your calls). So for $70 strike:

 

 

There is a put buyer ready to buy 134 contracts at $1040 per contract.

 

 

 

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

 

 

There is a call seller ready to sell you 24 calls at $920 per contract:

 

 

http://i.imgur.com/v0vfFPc.png

 

 

 

 

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

 

 

Regarding which strike price is the most optimal: The answer is that whichever is closest to the actual price on that day (assuming you hold the option till the expiration). The second priority is to ensure that the buy/sell spread isn't HUGE - in other words the options are liquid somewhat.

 

 

I have no idea if/when/how the price will be $90 or $120 at Jan 2015. What I do know is that I'm happy to buy shares of Outerwall at $70/share (but not $90/share) right now and in the most attractive way possible.

 

 

It just so happens that the market is flooded with put buyers and there's a dearth of put sellers. You get paid a HUGE premium if you write puts. So huge in fact that it easily covers the cost of your calls (so you retain full upside just as you would if you simply bought the stock) and there's some money left over after you buy the calls.

[yadayada]

wait my post was a bit of a mess. What platform is that? I use yahoo, and it says volume zero. But yours looks better.

 

And i see your right indeed, you can't just take the biggest premium.

[siddharth18]

^^ IT's E*Trade. Pretty much any platform should give you this level of granular detail about an option though.

[moody202]

Interesting discussion on the option strategy.

 

What do you think about buying Jan '15 $75 calls for $6.60 and selling Jan'15 $60 puts for $7.20?

 

This reduces the exposure on the downside from $70 to $60? Yes you won't make too much money on the difference options costs but to me protecting downside is more important than getting couple of dollars.

 

Has anyone verified that the $250M FCF is after the capital investments in eKiosk business?

 

Also -- Are we dealing with a classic 'Cigar Butt' here?

[yadayada]

240 is including all ecoatm cap ex

 

to add, I think there are mainly 2 types of customers, people who only watch movies like once every 2 months (so netflix is not a v good value proposition) and people who have netflix, and want to see new releases that are not on netflix.

 

for the second customer:

 

So studios made about 7 billion off dvd sales I think, about 1/3 of that is new releases? I think it was almost half like 2 years ago, so this is conservative.

 

What are profit margins like? 30%?  Let's say it is 20% to be safe. so 20% of 2.4 billion is 480 million.

 

Now for netflix, the value proposition here is, add like 15 movies 1-3 months (that much aboutright?) earlier and spend an extra 480 million? Or lets say profit declines, and this is not a zero sum thing, so they 240 million for the studios. They need about 26 million new subscribers. Given that they currently have 30 million subscribers in the US, I seriously doubt that is a good value proposition for netflix. Maybe when it aproaches 5 million? They grew subsribers by 23% this year.

 

For the first type of customer, you would need some kind of on demand streaming service. Because 80-100$ a year is not worth it for them ever, no matter how many new releases net flix has.

 

And given the sales studio's still have with dvd's, I dont think this is a risk. The costs of buying movie rights for this purpose would be too high. Or maybe it is if netflix starts doing that? But then they still dont offer the new releases, and there is still the impulse renter when costs of rental are v low.

 

 

Are there any thoughts on the economics of the ecoatm business? What is their moat there? It seems alot of electronics retailers can easily add a low cost way to do this right?

 

[yadayada]

Ok looked it up, and they said that ebitda margins are expected to be 20-25% . Currently depreciation was like 8%? I think cap exp once this matures is probably lower then that.  So about the same FCF yield as red box I think.

 

They said they expect to roll out between 5-10k of these things out in the US, currently they got about 1k. about 38 million units of electronics are traded in each year, and 175 million new sold.

 

And probably a decent % of americans do have some old electronics rotting away that they can't be bothered to sell. Which would give another large initial revenue boost?

 

They will make about 100-120k$ a kiosk on these things, so 500-1.2 bilion$ in revenue. Currently this is about 34k$ or something, so this doesn't seem unfeasable, given that these things are relatively unknown yet, and most of those 900 kiosks were installed later in the year (i got this by dividing 31 mill /900). with a 10% net profit margin, that is a business worth roughly 500-1.2 billion$. Possibly even more when they expand.

 

And I have thought about their businessmodel, which is that alot of retailers only offer credit. Or they wont take blackberry's and other old phones or like phones with a cracked screen.

 

Another thing is hassle, alot of people dont trade in or dont bother to sell on ebay because it is too much hassle, so that is another thing. With an ecoatm in alot of places, this will draw in alot of people who would have otherwhise let their old phones rot.

 

And as a moat against another automated kiosk competers, they have some patents, and it seems that copying this is not as easy. You have to work out the kinks, and then invest alot of money into expansion. While pretty much competing on price. So there is probably significant first mover advantage here. It took them 5 years of testing and finetuning them.

 

[siddharth18]

A great article outlining the dynamics of movie rights: http://www.nytimes.com/2014/03/27/technology/personaltech/why-movie-streaming-services-are-unsatisfying-and-will-stay-so.html and http://www.slate.com/articles/technology/technology/2009/04/mymythicalonline_rental_servicefor_movies.single.html

 

As Netflix has grown, it has begun to compete with premium channels for certain studio deals. This has led to speculation it’s aiming to snap up all such deals so it can one day create a truly great, comprehensive movie service.

 

But Netflix isn’t promising such a move. Last year, in a memo outlining its “long-term view” of its place in the future of media, the company said it “can’t compete on breadth of entertainment,” and instead described itself as a “focused passion brand.” Again, money is a hurdle. Snapping up rights to lots of movies will be expensive, pushing Netflix to raise its prices. It’s not clear if customers will tolerate that.

 

“People often ask us, ‘Why can’t you charge me $20 to give me everything I want?’ ” said Jonathan Friedland, Netflix’s chief spokesman. “The answer is, at $20 you still wouldn’t get everything you want — and we’d lose half our customers.”

[siddharth18]

http://www.businessinsider.com/redbox-dvd-rental-itunes-netflix-2014-4

[yadayada]

The more I read about this company the more bullish I am. So far it seems 1st quarter redbox and cstr still growing and going strong. They will generate about 300 million in FCF (with potential of pricing power). OUTR will probably buy back another 150 million$ in shares this year. So at like 75$ that is 2 million shares. So 18.4 million shares outstanding and a 6x multiple on redbox 230m in FCF and  10x multiple on coinstar's 70m would give you 2080m market cap. on 18.4m shares that is 113$. And that seems almost like a bear case to me. I think Redbox can lose like 40% of revenue before they have to start to downsize? If you give it 8x multiple that is more like 138$ per share end of 2014. or more then 100% upside.

 

Their new Ecoatm so far is doing about 15 million revenue I think, down a bit from last quarter? But this could be short term thinking. So far that implies about 63k$ per kiosk. Not happy that this will eat up like 50 million this year from that 300m$. They expect 100k$ a kiosk with about 25% ebitda margins, or between 5-10k kiosks. With 950 kiosks so far. That would be another 500-1 billion$ in value.

 

Then there is their new concept sample it:

http://gizmodo.com/automated-free-sample-kiosks-thwart-your-complimentary-1284035417

 

Which sounds promising.

 

Also any idea what the bear case is on Coinstar? My take is that you need scale, expertise and experience in operating these kiosks, and there is only really demand for one kiosk in a lot of stores. So you would have to compete on price, and that would ruin the nice business model. One retail chain so far has tried to take it inhouse but they failed. There was also one competitor that failed.

 

Just seems really dumb to short this stock. Even if you are v conservative, there doesn't really seem any downside at current valuations. Unless studio's suddenly decide to burn money.

 

Another interesting thing about DVD and Blu-ray sales is that Blu-ray went from selling 700 million$ in top 100 movies in 2009 to 1.7 billion$ in 2013. So not dead at all.

 

For top 20 it went from 500m to 1 billion$. For bluray alone! Studios have like 50% profit margins on those. Netflix cost of revenue was like 1.5 billion$ last year, on a lot more movies then just 20. So this won't become cheap for streaming anytime soon.

 

Total top 20 movies sales for blu ray and DVD in the US was actually 1.7b$ in 2011 1.8bn$ in 2012 and 1.8bn$ in 2013. They probably make close to a billion$ on those titles alone.

 

Also DVD sales in the US for top 100 titles went from 2.3 to 2.3 to 2 billion in 2011-13. So they are not exactly plummeting like you hear in the news. So unlikely they will kill this multi billion$ cash cow by selling it cheaply online or to netflix. So only risk here is really piracy. But research also shows that pirates actually buy more content legally then non pirating counterparts. 

 

See dvd and bluray sales numbers here:

http://www.the-numbers.com/home-market/dvd-sales/2013

 

 

Can anyone provide a good bear thesis here? Just seems ridicilous that they trade this cheap.

[yadayada]

also if their ecoatm provides additional 70m$ in FCF, coinstar stays steady at about 70m and redbox does 250m$ 2 years from now, their sharecount is like 16 million (which seems conservative). Putting  a 8x multiple on the whole bunch (also conservative, given that their DVD business will always serve a niche) gives you a 195$ shareprice. Seems the combination of share buy backs at cheap valuation and steady (knock on wood) FCF makes this a deadly combination for the shorts.

 

Best buy gets like a 10x multiple on their FCF right? And it seems that this business has a better outlook then best buy. Put a 10x multiple on the above and you get a shareprice of 243$. Or 253% upside.

[pantheman]

OUTR will probably buy back another 150 million$ in shares this year.

 

.......

 

Then there is their new concept sample it:

http://gizmodo.com/automated-free-sample-kiosks-thwart-your-complimentary-1284035417

 

 

For clarification (not meaning to nitpick), management guided to ~$90m left for this year's buy backs on the call today.

 

Also that gizmodo article talks about Freeosk which is different, as far as I'm aware, from SAMPLEit (http://sampleit.com). Freeosk may even be a superior product. My light google searching didn't find any outerwall connection to Freeosk. Hopefully management won't go too far down the rabbit hole with SAMPLEit only to realize Freeosk is better and worth an acquisition. Though I think that biz is free at this valuation as long as it doesn't suck FCF.

[yadayada]

really only 90m$? Is there a dividend? They said that more then 75% of FCF will go to shareholders right?

[pantheman]

Here's the quote (low end they'd do 165m in total this year, 95m of that remaining):

 

<Q - Mike J. Olson>: Hi, good afternoon. Just wanted to make   

sure I'm doing the math right here. So, you've already spent $70 million on buyback of the 75% to 100% of free cash flow that you'll return to shareholders. And I think you're guiding $220 million midpoint of free cash flow for 2014. So at the low end of the 75% to 100%, it would            suggest, maybe you'll need to buy back a minimum of around $95 

million in additional stock. Does that sound like it's in the ballpark?

                                             

<A - Galen C. Smith>: That's correct.

                         

<Q - Mike J. Olson>: Okay. And then is there any reason to expect that you'll change your policy in 2015 related to return of cash to shareholders, or is it just too early to say at this point?

 

<A - Galen C. Smith>: No, I mean, I think we look at this as an important part of our business. Our business generates a lot of free cash flow, and we've made the commitment to      return 75% to 100%. The mix may change over time in terms of share repurchases or doing it through a potential dividend down the road. But we want to continue to enhance     

shareholder value through this way.

 

[yadayada]

aah ok, that is because they did a buy back earlier this year. So if they get their ecoatm business to cash break even within 2 years, you can assume at least 200 million$ will probably go to shareholders.

 

I wonder how big of an edge they have against these freeosk kiosks? Seems they have experience, connections and easy acces to a lot of capital?

[siddharth18]

http://online.wsj.com/news/articles/SB10001424052702304422704579574191322689248

 

 

 

 

In February, Outerwall named a new chief for Redbox, Mark Horak, a former home entertainment executive at Time Warner Inc.'s Warner Bros. He is seeking to renegotiate studio deals on terms more favorable to Redbox, rather than pursuing simple renewals, said one person with knowledge of early talks.

 

 

"We will continue to seek win-win solutions in future discussions," a Redbox spokeswoman said. Mr. Horak declined to comment.

 

 

Just a few years ago, many in Hollywood considered Redbox a key reason that profitable DVD sales were in free fall. Buying a DVD for $15 became hard to justify when people could pay $1 a night to rent it at a store they frequently visit. Others said Redbox appealed to different, more price-sensitive consumers.

 

 

Litigation ensued and ultimately three major studios agreed to let Redbox offer DVDs four weeks after they go on sale. Another three took bigger payments in exchange for giving Redbox DVDs on launch day.

 

 

Recently, Blockbuster stores have closed and Netflix has shifted its emphasis to streaming and away from its DVD-by-mail business, leaving Redbox the nation's largest DVD renter with more than 40 million customers in the first quarter. Though most of Hollywood wishes it charged more, few want to see the last man standing in physical rental disappear soon. "They have become a very important customer," said one senior studio executive.

 

 

[siddharth18]

Looks like my patience is paying off (kinda). Outerwall drops more than 6%...because according to B. Riley "it may never again be viewed as a growth story."

 

Current market cap is $1.25B. The lowest guided FCF by management which is $200M and which incorporates $40M "growth" capex gives a 16% FCF yield on equity.

 

I wrote some $60.00 Oct2014 puts and collected $4.5 in premium.

 

 

Outerwall sinks after downgrade on challenging revenue outlook Shares of Outerwall (OUTR) are sinking after research firm B. Riley downgraded the stock, saying that the company may find it difficult to increase the revenue generated by its Redbox movie rental business. WHAT'S NEW: Shifts in consumer behavior and changes in the movie rental industry will increasingly impact Redbox going forward, creating obstacles for the business' revenue growth, B. Riley analyst Eric Wold wrote in a note to investors earlier today. Additionally, given Redbox's fixed costs and Wold's belief that any benefit to Outerwall from higher Redbox prices could prove temporary, the analyst warned that Outerwall may have trouble increasing its profit margin. Outerwall may never again be viewed as a growth story, according to the analyst, who cut his rating on the stock to Neutral from Buy and slashed his price target on the name to $76 from $100. PRICE ACTION: In early trading, Outerwall dropped $2.16, or 3.5% to $63.20.

[yadayada]

yea the negativity surrounding this company is insane. I read that 10 years ago people were shorting it because coinstar was going to get killed (which didnt happen).

 

Also analysts are justifying a multiple of 5-7 because it will possibly no longer be growing? With added effect of buybacks (90million$ left this year at 70$ levels bought back), and a multiple of 8x on 200 million$ which seems very conservative, you get 1600/19 = 84$.

 

This assumes FCF will start decreasing slowly, no more pricing power, and no succes with ecoatm or any other ventures priced in.

 

@siddhart: why puts? Why not buy 2016 calls? You have 1.5 years.

 

75 or 80$ strike calls?

 

If they buy back with 90 million this year at 70$ and with 150 million next year at 80$, = 3.15 million shares bought back. So about 17 million shares. Give 200 million$ a 8x multiple with 17 million shares = 94$ (which seems very conservative). You would make like 200% with the 80$ calls there. And the buy backs provide a margin of safety and catalyst here.

 

And if you are bullish on Ecoatm, this gives plenty of time to prove that. All the catalysts here make me like the leaps here.

 

How you get comfortable writing puts with the volatility of this stock?

[siddharth18]

 

@siddhart: why puts? Why not buy 2016 calls? You have 1.5 years.

 

75 or 80$ strike calls?

 

If they buy back with 90 million this year at 70$ and with 150 million next year at 80$, = 3.15 million shares bought back. So about 17 million shares. Give 200 million$ a 8x multiple with 17 million shares = 94$ (which seems very conservative). You would make like 200% with the 80$ calls there. And the buy backs provide a margin of safety and catalyst here.

 

And if you are bullish on Ecoatm, this gives plenty of time to prove that. All the catalysts here make me like the leaps here.

 

How you get comfortable writing puts with the volatility of this stock?

 

Based on my past experiences with OUTR, I think we'll see a bloodbath type sell-off sooner than later and I'm waiting for it. The small put purchase is just me getting ready and saying "OK I'm seriously interested in buying at $56/share." So I'm just playing it more conservatively. With the puts, I either am forced to pay $56/share or have my money earning 23% annualized if the puts I sold, expire worthless.

 

I place a zero value on EcoATM, assume Coinstar (coin counting) remains stable and Redbox can stay flattish with price increases somewhat making up for slowing (or slight declining) SSS .